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• The US Dollar is steady as Dollar bulls are in the driving seat for now. 
• Friday’s focus is on PCE, the Fed’s preferred inflation metric. 
• The US Dollar Index closed nearly at the session’s high on Thursday and clung on to minor gains at 103.35.

The US Dollar (USD)  is comfortably in the green and holding on to gains as the PCE data is nearing the US waking up, after another session of mild US Dollar strength during European trading. Overnight, People’s Bank of China (PBoC),  the Chinese central bank, issued again a much stronger fixing for its Yuan against the US Dollar, but markets are ignoring it in full, sending USD/CNY up to possibly setting a new six-month high on Friday. There are no real trends to distillate on the quote board as the US Dollar posts modest gains against most currencies. 

There aren’t any Federal Reserve (Fed) speaking on Friday, so traders can mainly go into data trading. At 12:30 GMT, the Personal Consumption Expenditures (PCE) Price Index numbers will come out. This is the preferred inflation measure for Fed Chairman Jerome Powell to assess how or where inflation is at the moment in the US. Later, the Chicago Purchase Managers Index is due at 13:45 GMT, while at 14:00 GMT the final reading of the University of Michigan Consumer Sentiment Index for June will be released. Depending on their outcome, these two data points could support some more follow-through on the current trend in the US Dollar or trigger a turnaround.  
 

Daily digest: US Dollar awaiting PCE data

• The US State Department approved a possible military sale to Taiwan, adding tension against China after the earlier AI chip export curbs of the US toward China. The sale would still need to pass several security checks and approvals before actually taking place. 
• The Japanese Yen weakened to $145 for the first time since November and is at risk of market intervention by the Japanese finance ministry. 
• China’s PBoC fixed the USD/CNY at 7.2258, quite far below the expected 7.2485 from market consensus. Markets ignored the fixing and even sent USD/CNY completely the other way to peak at $7.27.
• The most expected market-moving event for Friday is at 12:30 GMT, namely the Personal Consumption Expenditures Price Index data for May. The PCE Index on a monthly basis is expected to come in at 0.5%, accelerating from 0.4% in April. On a yearly basis, PCE inflation is expected to increase by 4.6%, more than the 4.4% rise seen a month earlier.  Both the monthly and yearly Core PCE is seen stable at 0.4% and 4.7%, respectively. Any bigger jump in PCE, both Core or headline, would strengthen the US Dollar as it would increase the chances of more Fed hikes. Personal Income is expected to increase at a steady pace of 0.4%, while Personal Spending is expected to decelerate significantly,  from 0.8% to only 0.2%.
• At 13:45 GMT, Chicago Purchasing Managers Index for June is expected to head from 40.4 to 44. An uptick, though still below 50 and thus pointing to a contraction in the region’s business activity. 
• Just 15 minutes later, at 14:00 GMT, the Michigan Consumer Sentiment Index for June will come out, which is expected to remain unchanged at 63.9. Participants in the survey had the opportunity as well to pencil in inflation expectations over the next year and for the next 5-to-10 years. Currently, the one-year inflation forecast is at 3.3%. An uptick or lower number could move the US Dollar in either direction.
• Equities are mixed, with minor gains and losses. In Asia, the Hang Seng is up 0.10% while the Japanese Topix closed down 0.33%. In Europe, the German DAX and the Stoxx 50 are mildly green. US Futures are mixed, with the Dow Jones Industrial below zero but the S&P 500 and Nasdaq futures registering mild gains. 
• The CME Group FedWatch Tool shows that markets are pricing in an 86.8% chance of 25 basis points (bps) interest-rate hike on July 26. The Fed hike is very much locked in as US GDP numbers showed that the US economy can withstand and endure some more rate hikes. Still, markets are reluctant to price in a second rate hike in the last meetings for 2023.
• The benchmark 10-year US Treasury bond yield trades at 3.87%. The proof of the US economy is in good health made investors reduce their safe haven positions and pushed US yields higher.  
   

US Dollar Index technical analysis: USD in wait-and-see for data

The US Dollar trades overall very much in the green against the most common currencies, with one or two outliers. No real symmetry to be noticed either as we have seen the past week when often Asia was weaker while currencies in Central and Eastern Europe were substantially stronger. Expect traders to keep their powder dry and see the US Dollar index reside where it is at the moment, near Thursday’s high at 103.40.

On the upside, look for 103.50 as the next key resistance level in order to lock in some solid support and a safe region where the Dollar index can take a breather before heading higher. The 200-day Simple Moving Average (SMA) at 104.98 is still quite far away. So the intermediary level to look for is the psychological level at 104.00 and May 31  peak at 104.70.

On the downside, the 55-day SMA near 102.67 is up for proving its reliability as a support after being chopped up that much in the last two weeks. A touch lower, 102.50 will be vital to hold from a psychological point of view.  In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.
 

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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