US Dollar builds on Friday's gains, markets eye one more Fed rate hike in May

• US Dollar gathers strength to start the week following Friday’s decisive rebound.
• Markets expect the Federal Reserve to raise its policy rate again in May.
• EUR/USD needs to hold above 1.0900 to keep buyers interested.

The US Dollar (USD) started the new week on a bullish note after having registered strong gains against its major rivals ahead of the weekend. The latest macroeconomic data releases from the United States (US) and hawkish comments from Federal Reserve (Fed) officials help the USD keep its footing.

The US Dollar Index, which tracks the USD performance against a basket of six major currencies, extends its recovery toward 102.00 following a more-than-0.5% increase seen on Friday.  

Daily digest market movers: US Dollar benefits from rising US yields

• The benchmark 10-year US Treasury bond continues to stretch higher on Monday after having gained nearly 2% to reclaim 3.5% on Friday. 
• Wall Street's main indexes opened mixed as investors stay focused on earnings figures.
• The data published by the US Census Bureau revealed on Friday that Retail Sales declined by 1% on a monthly basis in March. On a positive note, March’s reading of -0.4% got revised higher to -0.2%.
• The University of Michigan’s (UoM) Consumer Confidence Index improved modestly to 63.5 in April’s flash estimate from 62 in March.
• The one-year consumer inflation expectation component of the UoM’s survey climbed to 4.6% from 3.6% in March, providing a boost to the USD.
• "Monetary policy will need to remain tight for a substantial period and longer than markets anticipate,” Federal Reserve Governor Christopher Waller said on Friday. Waller further argued that the recent data show that the Fed hasn't made much progress on its inflation goal.
• In an interview with Reuters, Atlanta Fed President Raphael Bostic noted that recent developments in the US economy were consistent with one more rate hike.
• According to the CME Group’s FedWatch Tool, markets are currently pricing in a more-than-80% probability of a 25 basis points (bps) Fed rate hike in May.
• NY Fed' Empire State Manufacturing Index improved sharply to 10.8 in April from -24.6 in March, compared to the market expectation of -18.
• On Wednesday, the Fed will release the Beige Book. Existing Home Sales and Initial Jobless Claims data will be featured in the US economic docket on Thursday ahead of S&P Global’s Manufacturing and Services PMI surveys on Friday.
• Previewing the Fed’s publication, “since the March 21-22 meeting, the data suggest that activity is slowing, the labor market is softening, and price pressures are easing,” said analysts at BBH. “Notably, supply chains continue to improve.  We believe the Beige Book will highlight these trends that support a pause after what is widely expected to be another 25 bp hike whilst leaving the door open for further tightening if needed.”

Technical analysis: US Dollar holds its ground against Euro

On the daily chart the Relative Strength Index (RSI) indicator declined below 60 on Monday, suggesting that the pair is staging a technical correction. On the downside, 1.0900 (20-day Simple Moving Average (SMA) aligns as first technical support ahead of 1.0760 (50-day SMA) and 1.0700 (100-day SMA).

In case EUR/USD manages to stabilize above 1.1000 (psychological level, static level), sellers could be discouraged. In that scenario, 1.1100 (psychological level, static level) could be seen as the bullish target before 1.1160 (static level from April 2022) and 1.1200 (psychological level).

What is US Dollar Index (DXY)?

The US Dollar Index, also known as DXY or USDX, is a benchmark index that was established by the US Federal Reserve in 1973. DXY is widely used as a tool measuring the US Dollar (USD) value in global markets. The index is calculated by measuring the US Dollar’s performance against a basket of six foreign currencies, the Euro, the Japanese Yen (JPY), Swedish Krona (SEK), the British Pound (GBP), the Swiss Franc (CHF) and the Canadian Dollar (CAD).

With 57.6%, the Euro has the biggest weight in the index followed by the JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%). Hence, a sharp decline in the EUR/USD pair could help the US Dollar Index rise even if the US Dollar weakens against some of the other currencies in the basket.