USD On Watch

The US Dollar is in focus this week as traders brace for a slew of tier-one data. The headline release to focus on will be core PCE data due on Thursday. Given the importance of the data for the Fed in calculating true inflation, the release holds the potential to create plenty of volatility across markets. The market has recently readjusted its view on Fed rate projections this year, in line with recent data strength and hawkish Fed commentary. Pricing for a rate cut in May has now fallen below 50% with pricing for a cut in June having weakened also.

PCE Impact

If the data shows that inflationary pressures remained elevated last month this should further dilute near-term rate-cut expectations, allowing USD to move higher again this week. With the Fed reaffirming its message that it is in no rush to cut rates, it would likely take a sharp downside surprise to cause a meaningful shift in the market’s perspective. Last week, the FOMC minutes saw policymakers agreeing on the need to be cautious in moving out of restrictive territory on rates. While this narrative remains in place, USD is likely to remain buoyant.

Technical Views

DXY

The rally has stalled for now into a test of the 104.95 level resistance. The correction lower has seen the market testing below the bull channel lows with 103.48 underpinning price action. Momentum studies are bearish, flagging risks of a potential move lower. However, while current support remains intact the focus is on a resumption of the bull trend with 105.91 sitting above as the next target for bulls. 

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