US Dollar struggles to hold its ground despite hawkish Fed comments

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• US Dollar has lost its strength following a decisive two-day rebound.
• Markets expect the Federal Reserve to raise its policy rate again in May.
• EUR/USD technical outlook suggests that the bullish bias stays intact.

The US Dollar (USD) has lost its footing after having registered strong gains against its major rivals for two straight trading days. The upbeat macroeconomic data releases from China seem to have eased fears over a global economic slowdown. Hence, the USD is having a difficult time attractions investors as a safe haven.

The US Dollar Index, which tracks the USD performance against a basket of six major currencies, turned south and declined toward 101.50 despite having closed above 102.00 on Monday.

Daily digest market movers: US Dollar on track to snap two-day winning streak

• Wall Street’s main indexes opened mixed on Tuesday. Technology-heavy Nasdaq Composite Index started the day in positive territory but the Dow Jones Industrial Average declined with the Financials Index staying on the back foot.
• St. Louis Federal Reserve President James Bullard told Reuters that interest rates will need to continue to rise in the absence of clear progress on inflation. Bullard further noted that he is still seeing the “adequately restrictive policy rate” at 5.50%-5.75% range and added that is biased to hold rates there for longer until inflation contained.
• The data from China showed that the world’s second-largest economy expanded by an annualized rate of 4.5% in the first quarter, much stronger than the 2.9% growth recorded in the last quarter of 2022. This reading also came in better than analysts’ estimate for an expansion of 4%. Other data revealed that Industrial Production expanded by 3.9% and Retail Sales rose by 10.6% on a yearly basis, compared to analysts’ estimate of 7.4%.
• 10-year US Treasury bond yield holds steady above 3.5% after having gained nearly 6% in the last three trading day. 
• Housing Starts in the US declined by 0.8% on a monthly basis in March following February’s increase of 7.3% (revised from 9.8%). In the same period, Building Permits decreased by 8.8%, compared to market expectation of +1.45%. 
• Richmond Fed President Thomas Barkin said on Monday that he wants to see more evidence of inflation settling back to target.
• The data published by the US Census Bureau revealed on Friday that Retail Sales declined by 1% on a monthly basis in March. On a positive note, March’s reading of -0.4% got revised higher to -0.2%.
• The University of Michigan’s (UoM) Consumer Confidence Index edged higher to 63.5 in April’s flash estimate from 62 in March.
• The one-year consumer inflation expectation component of the UoM’s survey climbed to 4.6% from 3.6% in March, providing a boost to the USD.
• “Monetary policy will need to remain tight for a substantial period and longer than markets anticipate,” Federal Reserve Governor Christopher Waller said on Friday. Waller further argued that the recent data show that the Fed hasn’t made much progress on its inflation goal.
• In an interview with Reuters on Friday, Atlanta Fed President Raphael Bostic noted that recent developments in the US economy were consistent with one more rate hike.
• According to the CME Group’s FedWatch Tool, markets are currently pricing in a more-than-80% probability of a 25 basis points (bps) Fed rate hike in May.
• NY Fed Empire State Manufacturing Index rose sharply to 10.8 in April from -24.6 in March, compared to the market expectation of -18.
• On Wednesday, the Fed will release the Beige Book. Existing Home Sales and Initial Jobless Claims data will be featured in the US economic docket on Thursday ahead of S&P Global’s Manufacturing and Services PMI surveys on Friday.
• Previewing the Fed’s publication, “since the March 21-22 meeting, the data suggest that activity is slowing, the labor market is softening, and price pressures are easing,” said analysts at BBH. “Notably, supply chains continue to improve. We believe the Beige Book will highlight these trends that support a pause after what is widely expected to be another 25 bps hike whilst leaving the door open for further tightening if needed.”

Technical analysis: US Dollar stays vulnerable against Euro

Following the two-day slide that saw the pair come within a touching distance of 1.0900, EUR/USD has regained its traction early Tuesday. The Relative Strength Index (RSI) indicator on the daily chart has returned to the 60 area, reflecting the lack of seller interest. Furthermore, the pair continues to trade within the ascending regression channel coming from late September.

EUR/USD faces immediate resistance at 1.1000 (psychological level, static level). Once the pair reaffirms that level as support, it could target 1.1100 (psychological level, static level), 1.1160 (static level from April 2022) and 1.1200 (psychological level).

On the downside, 1.0900 (20-day Simple Moving Average (SMA) stays intact as support ahead of 1.0800 (psychological level), 1.0760 (50-day SMA) and 1.0720 (100-day SMA).

What is US Dollar Index (DXY)?

The US Dollar Index, also known as DXY or USDX, is a benchmark index that was established by the US Federal Reserve in 1973. DXY is widely used as a tool measuring the US Dollar (USD) value in global markets. The index is calculated by measuring the US Dollar’s performance against a basket of six foreign currencies, the Euro, the Japanese Yen (JPY), Swedish Krona (SEK), the British Pound (GBP), the Swiss Franc (CHF) and the Canadian Dollar (CAD).

With 57.6%, the Euro has the biggest weight in the index followed by the JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%). Hence, a sharp decline in the EUR/USD pair could help the US Dollar Index rise even if the US Dollar weakens against some of the other currencies in the basket.