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US Dollar (DXY): Rebounds as Fed’s Rate Hike Expectations Take Center Stage

By:
James Hyerczyk
Updated: Jun 9, 2023, 15:24 UTC

Dollar (DXY) shows resilience as Fed's rate hike expectations dominate, creating market uncertainty.

US Dollar Index

In this article:

Highlights

  • Dollar rebounds on speculation of postponed Fed rate hikes.
  • Labor Department data sparks debate on the strength of the economy.
  • Market uncertainty prevails amidst global central bank meetings.

Overview

The dollar (DXY) displayed resilience on Friday as it rebounded from its two-week lows, defying recent weakness. This recovery can be attributed to the growing expectation that the Federal Reserve will postpone further interest rate hikes. Investors eagerly anticipated the upcoming Federal Reserve monetary policy meeting, leading to an increase in U.S. Treasury yields. However, the decision on interest rates, which will be announced during the meeting, has introduced uncertainty into the market. Mixed signals from Fed officials and economic data have left investors questioning the direction of the central bank’s rate-hiking campaign.

The Labor Department released data showing higher weekly initial jobless claims, reaching their highest level since October 2021. Some investors interpreted this as evidence that the Fed’s rate hikes were effectively cooling down the economy, including the job market. Consequently, they speculated that the Fed would not raise rates further in the upcoming meeting. However, additional data, such as the consumer inflation report for May scheduled on Tuesday, will be considered before the Fed makes its decision.

Central Banks’ Key Meetings

The upcoming week holds significant importance for monetary policy, with key meetings scheduled for the Federal Reserve, the European Central Bank, and the Bank of Japan. Meanwhile, the dollar index experienced a 0.8% decline on Thursday due to an increase in the number of Americans filing unemployment claims, reaching the highest level in over 1-1/2 years. This decline marked the largest one-day fall since the regional banking crisis in March, highlighting concerns about the health of the banking sector. The index is set for its most substantial weekly drop since mid-March.

Economic Speculation Rises Amid Jobless Claims Surge

The recent rise in jobless claims has sparked speculation about the strength of the U.S. economy. Market participants are currently pricing in only a 25-basis-point rate hike by the Fed next week, with a one-in-four chance. Money markets are reflecting a cautious sentiment, awaiting the Fed’s decision to gain further insight into its future actions.

BOC, RBA Moves Shape Market Expectations

The actions taken by other central banks have also influenced market expectations. The Bank of Canada and the Reserve Bank of Australia surprised markets by raising interest rates this week to combat persistent inflation. This has raised expectations for other central banks to maintain a firm stance against price pressures. The European Central Bank is expected to increase Euro Zone rates by 25 basis points to 3.50% during their meeting on Thursday. However, the focus remains on the Fed’s stance as investors closely monitor its decisions.

Currencies React to Central Bank Policies

Amidst these developments, the euro slightly retreated from its two-week high, while sterling continued its upward trend with a 0.17% increase. The dollar also rebounded against the Japanese yen, rising 0.4% following remarks by BOJ Governor Kazuo Ueda, who reiterated the central bank’s commitment to an ultra-loose monetary policy.

Treading Water Ahead of Central Bank Decisions

Overall, market participants are cautiously observing the performance of the dollar and the outcomes of the upcoming central bank meetings. The mixed signals from the Fed, combined with economic data and global monetary policy decisions, have created an environment of uncertainty. Investors eagerly await further clarity in the days ahead.

Technical Analysis

Daily June US Dollar Index

The main trend is up, however, momentum is trending lower.

After consolidating for several days, the market broke through support at 103.631 (R1), putting the index in a weak position, while shifting momentum to the downside. This level is new resistance.

While a break under 103.631 will be a sign of weakness. The trigger point for an acceleration to the downside is 103.270 (S2).

Recovering 103.631 will signal the return of buyers.

S1 – 103.631 R1 – 103.631
S2 – 103.270 R2 – 104.406
S3 – 102.405 R3 – 104.615

For a look at all of today’s economic events, check out our economic calendar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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