US Dollar Weekly Forecast: Eking out gains as market focuses on April inflation data

A tepid recovery during the week led to a bounce of the US Dollar (USD) to the area beyond the 105.00 barrier when gauged by the USD Index (DXY), reversing two consecutive weeks of negative price action.

Once again, the weekly performance of the Greenback primarily reflected investors' reactions to changing sentiments regarding the potential timing of the Federal Reserve’s (Fed) easing programme. The possibility of a rate adjustment at the September 18 meeting seems to have gained traction and is currently perceived as the most probable option among market participants.

On the latter, CME Group’s FedWatch Tool sees the probability of lower rates at the September 18 gathering as around 70%.

Supporting the above emerged further cooling of the US labour market, as demonstrated by higher-than-expected weekly Initial Jobless Claims, while a cautious message from many of the Fed's policymakers added to this view.

That said, Minneapolis Federal Reserve President Neel Kashkari suggested that the robust housing market and a potential slowdown in inflation progress might imply that monetary policy is not as restrictive as Fed officials perceive it to be. On Wednesday, Federal Reserve Bank of Boston President Susan Collins emphasized the necessity for the US economy to cool down as a means to bring inflation back in line with the central bank’s 2% target, while San Francisco Federal Reserve President Mary Daly remarked on Thursday that there is "considerable" uncertainty regarding the trajectory of US inflation in the upcoming months, while expressing confidence that price pressures are still gradually easing.

Back to the US money markets, the recent performance of the US Dollar corresponded with a consolidative mood in US yields at the lower end of the monthly range across various maturity periods. This occurred against an unchanged macroeconomic backdrop, suggesting the potential for only one or perhaps no rate cuts at all for the remainder of the year.

Regarding interest rate trajectories among G10 central banks and inflation dynamics, it is anticipated that the European Central Bank (ECB) may reduce interest rates during the summer, possibly followed by the Bank of England (BoE). However, both the Federal Reserve and the Reserve Bank of Australia (RBA) are expected to commence easing later this year, potentially in the fourth quarter. 

In the week ahead, the salient event will be US inflation figures for April tracked by the Consumer Price Index (CPI). Other important data to be released are the Producer Price Index (PPI) or Retail Sales. Fed's policymakers will continue to take the stage to signal their outlook on interest rates. 

Technical Analysis of USD Index (DXY)

In the event of intensified downward pressure, the USD Index (DXY) is projected to find temporary support at the 55-day Simple Moving Average (SMA) at 104.61, followed by the May bottom of 104.52 (May 3) and the more relevant 200-day SMA of 104.28. A deeper decline exposes the April 9 low at 103.88 ahead of the provisional 100-day SMA at 103.96 and the March low at 102.35 (March 8). Further decline could lead to a test of the December low at 100.61 (December 28), ahead of the psychological barrier of 100.00, and the 2023 bottom at 99.57 (July 14).

On the contrary, bullish momentum could prompt a retest of the 2024 peak at 106.51 (April 16). Surpassing this level might encourage market participants to consider revisiting the November high at 107.11 (November 1), just before the 2023 top at 107.34 (October 3).

From a broader perspective, the prevailing bullish bias is anticipated to persist as long as DXY remains above the 200-day SMA.