US Dollar (DXY): Rebounding as Softer UK Inflation Data Sinks British Pound

Highlights

• US Dollar rebounds as softer UK inflation data weakens the British Pound.
• Traders’ anticipation of an imminent peak in Federal Reserve interest rates capping US Dollar gains.
• Weaker British Pound and Japanese Yen contribute to the US Dollar’s respite.

Overview

The US Dollar (DXY) has found some respite from its recent steep decline against major currencies. Traders’ anticipation of an imminent peak in Federal Reserve rates was fueled by a cooler-than-expected US inflation reading. This pause in the decline is also influenced by a weaker British pound and Japanese yen.

Economists polled by Reuters predict a 25-basis-point rate hike at the upcoming Federal Reserve policy meeting this month. The majority believes this hike will mark the end of the central bank’s current tightening cycle.

Pound Weakens as Inflation Disappoints

On the other side, the British pound weakened after lower-than-expected inflation data suggested the Bank of England might not need to raise rates as aggressively as previously anticipated. Additionally, dovish comments from the Bank of Japan caused the yen to soften.

The pound’s decline against the dollar reached its largest percentage drop in three weeks, following its recent high of $1.3144. The data showed British inflation falling more than expected in June, reaching its slowest rate in over a year at 7.9%.

The profit-taking in sterling is not surprising as Gilt yields decrease compared to US Treasuries and Bunds. After the recent surge, the pound was considered overbought in relation to British, US, and German government bonds.

Prior to Wednesday’s data release, investors had estimated a 60% chance of the Bank of England hiking rates by a half-percentage point on August 3. However, this decreased to a 60% chance of a quarter-percentage point hike after the inflation data was revealed.

Yen Weakens on BOJ Official Comments

Meanwhile, the US dollar strengthened against the Japanese yen, reaching a one-week high, as Bank of Japan Governor Kazuo Ueda emphasized the need for sustaining the central bank’s 2% inflation target. This stance contrasts with the hawkishness displayed by other major central banks.

Profit-takers Hit the Euro

In other currency news, the euro experienced a slight decline to $1.12185, moving away from its 17-month peak of $1.1276. As a result, the dollar index rebounded from the previous session’s 15-month low, showing a 0.27% increase at 100.24.

Short-Term Outlook:  Early Position-Squaring Ahead of Fed Announcements

As market participants anticipate the upcoming Federal Reserve policy meeting, the US dollar has momentarily halted its decline. However, the dynamics of various central banks and their monetary policies continue to influence currency movements.

Technical Analysis

The US Dollar (DXY) 4-hour chart currently shows a developing counter-trend rally despite bearish sentiment. The 4-hour price remains relatively unchanged compared to the previous close, indicating minimal movement. However, the price is significantly below both the 200-4H and 50-4H moving averages, reflecting a downward trend. The 14-4H RSI reading of 52.85 suggests momentum has shifted to the strong side, slightly above the neutral level of 50.

The support zone at 100.016 to 99.630 proved to be worthy. Athough the main trend is still down, the technical bounce being generated by the successful test of support could lead to a test of the 50-4H moving average at 100.708 over the near-term.