US Dollar stays rangebound as Wall Street trades mixed

The US Dollar (USD) stays relatively stable on Wednesday as investors refrain from committing to large positions ahead of next week's highly-anticipated data releases and central bank policy announcements. The US Dollar Index, which gauges the USD's valuation against a basket of six major currencies, fluctuates in a tight channel near 104.00 for the third straight day.

May Consumer Price Index (CPI) data from the United States (US) will be watched closely by market participants on Tuesday before the Federal Reserve (Fed) announces the interest rate decision on Wednesday. The Fed will also publish the revised Summary of Projections, the so-called dot plot.

Daily digest market movers: US Dollar finds a foothold mid-week

• Wall Street's main indexes trade mixed following a positive opening on Wednesday. At the time of press, the Dow Jones Industrial Average was up 0.15% and the S&P 500 Index was down 0.1%.
• The Bank of Canada's unexpected decision to raise its policy rate by 25 basis points to 4.75% seems to be weighing on market mood, while lifting global bond yields.
• In its latest outlook published on Wednesday, the OECD said that it sees the Fed funds rate peaking at 5.25%-5.5% from Q2 2023, followed by two "modest" cuts in the second half of 2024.
• The United States the goods and services deficit stood at $74.6 billion in April, the US Census Bureau reported on Wednesday. Exports declined $9.2 billion to $249 billion, while imports rose $4.8 billion to $323.6 billion.
• The Fed will release Consumer Credit Change for April later in the day.
• The monthly data published by the ISM showed on Monday that the business activity in the US service sector continued to expand in May, albeit at a softer pace than it did in April. The ISM Services PMI declined to 50.3 in May from 51.9 in April and missed the market expectation of 51.5.  
• Further details of the ISM PMI report revealed that the Prices Paid Index edged lower to 56.2 from 59.6 and the Employment Index dropped to 49.2 from 50.8.
• Commenting on the data, "there has been a pullback in the rate of growth for the services sector," noted Anthony Nieves, Chair of the Institute for Supply Management (ISM) Services Business Survey Committee. "This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the Supplier Deliveries Index) and capacity, which are in many ways a product of sluggish demand."
• The US Census Bureau announced on Monday that Factory Orders rose 0.4% in April following the 0.9% increase recorded in March.  
• According to the CME Group FedWatch Tool, markets are pricing in a more than 70% probability of the Fed leaving its policy rate unchanged at the upcoming meeting.
• The monthly data published by the US Bureau of Labor Statistics (BLS) showed on Friday that Nonfarm Payrolls rose 339,000 in May. This reading surpassed the market expectation of 190,000 by a wide margin. April's reading of 253,000 also got revised higher to 294,000. 
• Underlying details of the labor market report revealed that the Unemployment Rate climbed to 3.7% from 3.4% in the same period. The Labor Force Participation rate remained unchanged at 62.6%, while annual wage inflation, as measured by the change in Average Hourly Earnings, edged lower to 4.3% from 4.4%.
• "There's likely enough pockets of softness in this report for the FOMC to pass on raising rates at the next meeting, though another strong payrolls gain in June, coupled with another disappointing inflation report, could set the stage for a rate increase in July," economists at the Bank of Montreal said regarding the potential impact of the labor data on the Fed's policy outlook.

Technical analysis: US Dollar Index fluctuates at around key technical level

The US Dollar Index (DXY) trades at around 104.00, where the Fibonacci 23.6% retracement of the November-February downtrend is located. In the meantime, the Relative Strength Index (RSI) indicator on the daily chart stays comfortably above 50, suggesting that buyers look to remain in the driver's seat. 

104.50 (static level) aligns as first resistance for DXY ahead of 105.00 (psychological level). A daily close above the latter could bring in additional buyers and open the door for an extended rebound toward 105.60 (Fibonacci 38.2% retracement, 200-day Simple Moving Average (SMA)).

On the downside, bearish pressure could increase if DXY closes the day below 104.00. In that scenario, 103.50 (static level) could be seen as initial support before 103.00 (100-day SMA).

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.