US Dollar Index News: DXY Pressured by German Inflation Data Ahead of Fed

Key Points

• DXY faces decline, still set for significant monthly gain.
• Hawkish German inflation data reverses dollar’s earlier gains.
• ADP report indicates potential US labor market slowdown.

Overview

The US Dollar Index (DXY) is experiencing a sharp decline against major currencies, yet it is on track for its most significant monthly gain since September. This movement comes as traders anticipate the U.S. Federal Reserve’s rate decision.

At 15:05 GMT, the US Dollar Index (DXY) is trading 103.057, down 0.361 or -0.35%. The intraday high is 103.683.

Impact of Global Inflation Data

The greenback’s earlier gains were reversed following hawkish inflation data from Germany, indicating a shift in market sentiment. In contrast, French inflation moderated, initially contributing to the euro’s losses before the German data spurred a rally.

U.S. Labor Market and ADP Report

In the U.S., the ADP report indicated a sharp decline in private payroll growth in January, suggesting a potential slowdown in the labor market. This report sets the stage for the Labor Department’s nonfarm payrolls, expected to show a decrease from December’s figures. The ADP’s wage gain report, showing a 5.2% annual rise, also factors into market expectations.

Federal Reserve’s Anticipated Decision

The Federal Reserve is expected to hold interest rates steady, with a focus on whether it will signal future rate cuts. The interest rate futures market shows a decreased probability of a rate cut in March, which could influence the dollar’s strength.

Currency Pair Movements

The euro’s rise against the dollar, fueled by German inflation data, contrasts with the yen’s modest movements. The yen is poised for its largest monthly drop in a year, influenced by Japan’s economic indicators and the Bank of Japan’s policy stance. Additionally, the Bank of England’s upcoming policy announcement adds another layer of complexity to the GBP/USD trend.

Short-Term Market Forecast

In the short term, the DXY’s direction hinges on the Federal Reserve’s tone and upcoming economic indicators, including the employment cost index. The market is closely watching for signs of wage growth and policy shifts, which will be crucial in determining the dollar’s strength against other major currencies. The current trend suggests a cautious approach, with potential for further adjustments based on central bank decisions and economic data.

Technical Analysis

The US Dollar Index (DXY) is plunging on Wednesday after failing to sustain a rally over the long-term 200-day moving average a 103.525. The move appears to be creating enough downside momentum to bring the intermediate 50-day moving average into focus at 102.811.

Traders will be watching the market’s reaction to both moving averages at 19:00 GMT when the Fed makes its policy announcements.

Currently, it looks like the way of least resistance is down, which makes the index vulnerable to a steep break if the 50-day MA fails as support. Conversely, the trigger point for a potential upside breakout is the 200-day MA.