USD Fighting Back

It’s been a wild ride for the US Dollar over the last two weeks. Following the heavy sell off we saw last Wednesday in response to softer US inflation, a string of hawkish comments from Fed policymakers, as well as the release of the latest FOMC minutes, has helped drive a reversal in sentiment. Bullish momentum increased yesterday as traders reacted to the latest US PMI data. Both services and manufacturing were seen surging higher with services rising to 54.8 from 51.3 prior, well above the 51.2 expected. Manufacturing, meanwhile, rose to 50.9 from both 50 prior and expected. Together, business activity was seen hitting more than two-year highs.

Fed Easing Pushback

With several Fed members seen pushing back against near-term rate-cut expectations and with the FOMC minute highlighting concern over inflation progress, traders have started scaling back near-term easing expectations. Pricing for a September cut now hangs in the balance at around the 50% mark. The key driver now will be incoming inflation data in June and July. If we see a fresh drop in inflation, this should help bolster easing expectations, leading USD lower. However, if inflation remains sticky or rises, this will dilute 13 rate cut chances, driving USD higher.  Additionally, with the minutes showing some members in support of further hikes if inflation doesn’t play ball, there is plenty of hawkish risk to navigate.

Technical Views

DXY

Following the bounce off the bull channel lows, the index is now attempting to break back above the 104.95 level. With momentum studies turning higher off lows, if bulls can get back above here, the focus is on a continued push higher with 107.04 the next topside level to note. To the downside, 103.48 remains key support.