US Dollar holds ground ahead of key data releases

• US Dollar stays resilient against its rivals at the beginning of the week. 
• US Dollar Index trades at multi-week highs following last week's rally.
• Hawkish Fed bets continue to provide a boost to US Dollar.

The US Dollar (USD) preserves its strength to start the new week despite subdued trading action amid the Memorial Day holiday in the United States (US). The US Dollar Index (DXY), which tracks the USD's performance against a basket of six major currencies, holds steady above 104.00 after having gained 1% last week. 

Following the latest upbeat macroeconomic data releases from the US, investors reassess the Fed's policy outlook and now see a stronger chance of the US central bank raising the key interest rate one more time in June. In turn, the USD continues to find demand on the back of rising US Treasury bond yields.

In the second half of the week, the ISM Manufacturing PMI, ADP Employment Change and the US Bureau of Labor Statistics' May jobs report will be watched closely by market participants. 

Daily digest market movers: US Dollar benefits from hawkish Fed bets

• The US Bureau of Economic Analysis (BEA) reported on Friday that inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, rose to 4.4% on a yearly basis in April from 4.2% in March.
• The annual Core PCE Price Index, the Fed's preferred gauge of inflation, edged higher to 4.6%, compared to the market expectation of 4.6%. 
• Further details of the BEA's publication showed that Personal Income increased 0.4% on a monthly basis while Personal Spending rose 0.8%.
• Cleveland Fed President Loretta Mester told CNBC on Friday that PCE Price Index data underscore the slow progress on inflation. "It's important for the Fed not to under tighten the monetary policy," Mester added.
• According to the CME Group FedWatch Tool, markets are currently pricing in a less than 40% probability of the Fed leaving its policy rate unchanged at the upcoming meeting.
• On Sunday, US President Joe Biden and Republican House Speaker Kevin McCarthy reached an agreement to temporarily suspend the debt-limit to avoid a US debt default. The House of Representatives and Senate still need to approve the deal, which will suspend the $31.4 trillion debt-ceiling until January 1, 2025, in coming days. 
• Bond and stock markets in the US will remain closed on Monday.
• On Tuesday, the Conference Board will release the Consumer Confidence Index data for May.

US Dollar Index technical analysis: Buyers look to retain control

The Relative Strength Index (RSI) indicator on the daily chart stays near 70, suggesting that the US Dollar Index (DXY) could turn technically overbought in the near term. In case DXY stages a technical correction, 104.00 (Fibonacci 23.6% retracement of the November-February downtrend) aligns as key support. A daily close below that level could attract USD sellers and open the door for an extended slide toward 103.00, where the 100-day Simple Moving Average (SMA) is located.

If DXY continues to use 104.00 as support, buyers are likely to remain interested. Additionally, the bullish cross seen in the 20-day and the 50-day SMAs points to a build-up of momentum. On the upside, 105.00 (psychological level, static level) aligns as next resistance before 105.60 (200-day SMA, Fibonacci 38.2% retracement).

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.

The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.