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DXY recovering Following Inflation Selling

Following the sell off on Wednesday, the US Dollar is busy recovering losses as we head into the weekend. Earlier in the week, April US CPI came in at 3.4% annualised, down from 3.5% prior, marking the first monthly decline in six months. The data has put fresh focus on Fed easing expectations with USD seen heavily sold as pricing for a September cut jumped. However, comments from Fed policymakers on the back of the report have helped assuage some of that downside momentum, creating support for DXY into the lows of the week.
 

Uncertainty Around Fed

On the back of Wednesday’s USD sell off, Fed members Barkin, Mester and Williams each argued that the Fed should remain patient with inflation, keeping rates at current levels for longer. The comments were a clear pushback against the growing expectation that the Fed will ease in September. Despite the Fed signaling at the last FOMC meeting that it intends to push ahead with its projected rate cuts (3 rate cuts currently forecast), no easing in June creates a difficult timeline for the Fed to stick to. As such, traders have scaled back their expectations to just tow rate cuts this year.
 

Data is Key

The key for USD near-term will be whether the Fed is going to ease in September or hold off until later in the year. With labor market data cooling, inflation softening and growth falling short of forecasts, there is a clear case for near-term easing if data continues to trend lower. With that in mind, incoming data will now be highly impactful on USD, particularly inflation. If we see CPI continue to move lower this should bolster September easing chances, weighing on USD near-term.
 

Technical Views

DXY

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The sell off in DXY has seen the index breaking down below the 104.95 level. However, the dip has found support for now into a test of the bull channel lows with price now retesting 104.95 from below. If resistance holds, focus turns to a further break lower and a test of 103.48 next. Back above 104.95 and the bullish outlook returns towards 107.04. 

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