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US Dollar Index it risk of making a technical rejection ahead of US CPI

  • The Greenback on the backfoot this Tuesday while the US-China trade deal euphoria quickly fades. 
  • Traders mull the upcoming US CPI release while details remain sketchy on the US-China trade deal. 
  • The US Dollar Index slips back to 101.60 after failing to reclaim the  102.00 level.

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, corrects to near 101.60 halfway thrgouh the European trading session on Tuesday. The partial paring back of Monday’s gains comes as traders become wary of the lack of detail on the recent trade deal between China and the United States (US). Besides slashing the tariffs, no forward dates or topics are set, raising questions on what has been discussed, similar to the UK-US trade deal from Thursday. 

Meanwhile, on the economic data front, some dark clouds could form above the Greenback this Tuesday with the US Consumer Price Index (CPI) release for April. Markets expect an uptick in the monthly core and headline figures as US President Donald Trump’s ‘Liberation Day’ took place at the start of April. Overnight, Federal Reserve (Fed) Bank President of Chicago Austan Goolsbee warned that even current tariff levels will still have an inflationary impulse, the New York Times reported.

Daily digest market movers: Trump lashes out at EU

  • On Monday, President Trump lashed out at the European Union (EU), saying that the US has the upper hand in its trade discussions with the EU. “The European Union is in many ways nastier than China. We’ve just started with them. We have all the cards. They treated us very unfairly,” Trump said at the White House.
  • At 10:00 GMT, the National Federation of Independent Business (NFIB) released its Business Optimism Index for April. The actual number came in at 95.8 compared to the previous 97.4. The expectation was for a 94.5. 
  • At 12:30 GMT, the April US Consumer Price Index data will be released:
    • Monthly headline CPI is expected to surge to 0.3%, from the disinflationary -0.1% in March. The yearly figure is set to remain stable at 2.4%.
    • The Monthly core CPI is expected to tick up to 0.3%, from 0.1% in March. The yearly figure is set to remain unchanged at 2.8%.
  • Equities see a very binary picture this Tuesday, with Japan being the final region where the trade deal euphoria materialised. Chinese equities cut off that euphoria and dipped nearly 2% at their closing bell. European equities are flat and looking for direction, while US Futures are facing less than 0.5% of losses before their opening bell. 
  • The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in June’s meeting at just 8.2%. Further ahead, the July 30 decision sees odds for rates being lower than current levels at 38.6%.
  • The US 10-year yields trade around 4.45%, edging higher towards levels not seen since the beginning of April, and reducing rate cut bets for 2025.

US Dollar Index Technical Analysis: All just very briefly

Warning lights flashing this Tuesday for the US Dollar Index from a pure technical point of view. The fact that the DXY was unable to break 102.00 and closed below the important 101.90 technical level is opening up the door for a harsh retracement back to 100.00. The US CPI release later this Tuesday could be vital to either broaden the rejection with a weaker Greenback or push it firmly above 102.00.

On the upside, the DXY is flirting with a technical rejection against 101.90, which acted as a pivotal level throughout December 2023 and as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024. In case Dollar bulls push the DXY even higher, the 55-day Simple Moving Average (SMA) at 102.29 comes into play. 

On the other hand, the previous resistance at 100.22 is acting as firm support, followed by 97.73 near the low of 2025. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.

US Dollar Index: Daily Chart

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.