US Dollar modestly higher amid risk aversion

• US Dollar has regained its traction following Tuesday’s decline.
• The sharp increase seen in US Treasury bond yields helped the USD outperform its rivals.
• Wall Street's main indexes trade in negative territory but USD struggles to gather further strength.

The US Dollar (USD) has managed to shake off the selling pressure mid-week after having weakened against its major rivals on Tuesday. Rising United States (US) Treasury bond yields and the risk-averse market environment provided a boost to the USD. Although Wall Street's main indexes opened in the negative territory, the USD seems to be having a difficult time preserving its strength. In the absence of high-tier macroeconomic data releases and fundamental drivers, the USD's latest retreat looks to be technical movement in nature.

The US Dollar Index, which tracks the USD performance against a basket of six major currencies, reversed its direction and declined below 102.00 in the American session, erasing a large portion of its daily gains in the process.  

Daily digest market movers: US Dollar Index clings to small gains mid-week

• Stronger-than-expected Consumer Price Index (CPI) data from the UK revived fears over sticky global inflation and triggered a rally in global bond yields.
• The benchmark 10-year US Treasury bond yield turned north early Wednesday and climbed to its highest level in nearly a month above 3.6%.  
• Wall Street’s main indexes opened in negative territory after having closed virtually unchanged on Tuesday.
• St. Louis Federal Reserve President James Bullard told Reuters on Tuesday that interest rates will need to continue to rise in the absence of clear progress on inflation. Bullard further noted that he is still seeing the "adequately restrictive policy rate" at 5.50%-5.75% range and added that is biased to hold rates there for longer until inflation is contained.
• Housing Starts in the US declined by 0.8% on a monthly basis in March following February's increase of 7.3% (revised from 9.8%). In the same period, Building Permits decreased by 8.8%, compared to the market expectation of +1.45%. 
• The data from China showed on Tuesday that the world’s second-largest economy expanded by an annualized rate of 4.5% in the first quarter, much stronger than the 2.9% growth recorded in the last quarter of 2022. This reading also came in better than analysts' estimate for an expansion of 4%. Other data revealed that Industrial Production expanded by 3.9% and Retail Sales rose by 10.6% on a yearly basis, compared to analysts' estimate of 7.4%.
• 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 bps hike whilst leaving the door open for further tightening if needed.”
• Richmond Fed President Thomas Barkin said on Monday that he wants to see more evidence of inflation settling back to target.
• 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 edged higher 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 on Friday, 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.

Technical analysis: US Dollar Index loses recovery momentum

The US Dollar Index turned south after having met resistance at 102.20, where the 20-day Simple Moving Average (SMA) is located.

Meanwhile, the Relative Strength Index (RSI) indicator on the daily chart stays slightly below 50, suggesting that bulls remain hesitant to bet on additional USD strength. 

In case the DXY makes a daily close above 102.20, it could target 103.00 (static level, psychological level) and 103.50 (50-day SMA, 100-day SMA). 

On the downside, 101.50 (static level) aligns as interim support ahead of 101.00/100.80 (psychological level, static level, multi-month low set on April 14). A daily close below that support area could open the door for an extended slide toward 100.00 (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.