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• US Dollar stays resilient against its rivals at the beginning of the week. 
• US Dollar Index trades at multi-week highs following last week's rally.
• Hawkish Fed bets continue to provide a boost to US Dollar.

The US Dollar (USD) preserves its strength to start the new week despite subdued trading action amid the Memorial Day holiday in the United States (US). The US Dollar Index (DXY), which tracks the USD's performance against a basket of six major currencies, holds steady above 104.00 after having gained 1% last week. 

Following the latest upbeat macroeconomic data releases from the US, investors reassess the Fed's policy outlook and now see a stronger chance of the US central bank raising the key interest rate one more time in June. In turn, the USD continues to find demand on the back of rising US Treasury bond yields.

In the second half of the week, the ISM Manufacturing PMI, ADP Employment Change, and the US Bureau of Labor Statistics' May jobs report will be watched closely by market participants. 
 

Daily digest market movers: US Dollar rises on Fed rate hike expectations

• The US Bureau of Economic Analysis (BEA) reported on Friday that inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, rose to 4.4% on a yearly basis in April from 4.2% in March.
• The annual Core PCE Price Index, the Fed's preferred gauge of inflation, edged higher to 4.6%, compared to the market expectation of 4.6%. 
• Further details of the BEA's publication showed that Personal Income increased 0.4% on a monthly basis while Personal Spending rose 0.8%.
• Cleveland Fed President Loretta Mester told CNBC on Friday that PCE Price Index data underscore the slow progress on inflation. "It's important for the Fed not to under tighten the monetary policy," Mester added.
• According to the CME Group FedWatch Tool, markets are currently pricing in a less than 40% probability of the Fed leaving its policy rate unchanged at the upcoming meeting.
• On Sunday, US President Joe Biden and Republican House Speaker Kevin McCarthy reached an agreement to temporarily suspend the debt limit to avoid a US debt default. The House of Representatives and Senate still need to approve the deal, which will suspend the $31.4 trillion debt ceiling until January 1, 2025, in the coming days. 
• Bond and stock markets in the US will remain closed on Monday.
• On Tuesday, the Conference Board will release the Consumer Confidence Index data for May.
   

US Dollar Index technical analysis: Bulls look to continue to dominate the action

The Relative Strength Index (RSI) indicator on the daily chart stays near 70, suggesting that the US Dollar Index (DXY) could turn technically overbought in the near term. In case DXY stages a technical correction, 104.00 (Fibonacci 23.6% retracement of the November-February downtrend) aligns as key support. A daily close below that level could attract USD sellers and open the door for an extended slide toward 103.00, where the 100-day Simple Moving Average (SMA) is located.

If DXY continues to use 104.00 as support, buyers are likely to remain interested. Additionally, the bullish cross seen in the 20-day and the 50-day SMAs points to a build-up of momentum. On the upside, 105.00 (psychological level, static level) aligns as the next resistance before 105.60 (200-day SMA, Fibonacci 38.2% retracement).
 

How is US Dollar correlated with US stock markets?

Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation. 

During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.

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