US Dollar (DXY): Weaker as Euro Strengthens Amid Disappointing Economic Data

Highlights

• U.S. Dollar weakens due to stronger Euro and disappointing economic data.
• U.S. interest rate hike expectations revised as greenback hits one-month low.
• Euro strengthens with ECB rate hike and hawkish forward guidance.

Overview

The U.S. Dollar Index (DXY) faced downward pressure on Friday due to a stronger Euro and disappointing U.S. economic data, prompting traders to revise their expectations on future U.S. interest rate hikes. The greenback slipped and hit a one-month low of 101.585 against a basket of currencies.

While the U.S. Federal Reserve decided to leave interest rates unchanged, signaling a pause after a series of 10 consecutive rate hikes, they also hinted that borrowing costs might still need to rise by up to half a percentage point by the year’s end. However, recent data challenged this view, revealing a slowdown in U.S. economic activity and cooling inflation.

Softening US Economic Data

Manufacturing in the United States struggled in May, with production at U.S. factories nearly stalling under the weight of higher interest rates. Additionally, U.S. import prices declined during the same period. The Labor Department’s report showed that initial claims for state unemployment benefits remained unchanged at 262,000 for the week ended June 10, surpassing economists’ forecast of 249,000 claims. Despite these concerns, U.S. retail sales unexpectedly rose in May, driven by increased consumer purchases of motor vehicles and building materials.

Hawkish ECB Weighs on Dollar Demand

In contrast, the euro is strengthening following a rate hike by the European Central Bank (ECB) and hawkish forward guidance from ECB President Christine Lagarde. Lagarde expressed confidence in another rate hike in July and emphasized the need for the central bank to combat high inflation. The upward revision of inflation forecasts for 2024 and 2025 by the ECB surprised economists at Deutsche Bank, who anticipate a final 25 basis points hike in July, bringing the terminal rate to 3.75%.

Accomodative Bank of Japan Supportive

Meanwhile, the Bank of Japan (BOJ) maintained its short-term interest rate target of -0.1% and a 0% cap on the 10-year bond yield as part of its yield curve control policy, as widely expected. The yen initially weakened in response to the decision. However, it later recovered some losses as traders awaited BOJ Governor Kazuo Ueda’s post-meeting press conference.

Strong Euro Drives Bearish Dollar Trend

The current dynamics suggest a bearish trend for the U.S. Dollar in the short term, while the Euro remains on a bullish trajectory. The focus will now shift to upcoming central bank meetings and economic data releases. Both could further shape the direction of these currencies in the near future.

Technical Analysis

The US Dollar (DXY) is in a weak position on Friday after crossing to the bearish side of 101.736 and 102.208. Both levels are new resistance.

If the downside momentum continues then look for an acceleration to the downside with 100.340 the next potential downside target.

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