US Dollar advances ahead of Fed’s preferred inflation gauge

• The US Dollar rolls on after a very choppy trading day on Thursday. 
• Friday’s focus is on PCE, the Fed’s preferred inflation metric . 
• The US Dollar Index closed nearly at session’s high on Thursday and clings on to minor gains at 103.35.

The US Dollar (USD) is enjoying the inflow seen since Thursday after a very choppy trading session.  Upside inflation surprises in European countries made the Euro outperform the Greenback for most part of the European session, while US Gross Domestic Product numbers wiped recession fears off the table and made the Greenback the flavor of the day again. Overnight, People’s Bank of China (PBoC),  the Chinese central bank, issued again a much stronger fixing for its Yuan against the US Dollar, but markets are ignoring it in full, sending USD/CNY up to possibly set a new six-month high on Friday. There are no real trends to distillate on the quote board as the US Dollar posts modest gains against most currencies. 

There aren’t any Federal Reserve (Fed) speaking on Friday, so traders can mainly go into data-trading. At 12:30 GMT, the Personal Consumption Expenditures (PCE) Price Index numbers will come out. This is the preferred inflation measure for Fed Chairman Jerome Powell to assess how or where inflation is at the moment in the US. Later, the Chicago Purchase Managers Index is due at 13:45 GMT, while at 14:00 GMT the final reading of the University of Michigan Consumer Sentiment Index for June will be released. Depending on their outcome, these two data points  could support some more follow-through on the current trend in the US Dollar or  trigger a turnaround.  

Daily digest: US Dollar to see if strength is justified

• The US State department approved a possible military sale to Taiwan, adding tension against China after the earlier AI chip export curbs out of the US toward China. The sale would still  need to pass several security checks and approvals before actually taking place. 
• The Japanese Yen weakened to $145 for the first time since November and is at risk of a market intervention by the Japanese finance ministry. 
• China’s PBoC fixed the USD/CNY at 7.2258, quite far below the expected 7.2485 from market consensus. Markets ignored the fixing and even sent USD/CNY completely the other way to peak at $7.27.
• The most expected market moving event for Friday is at 12:30 GMT, namely  the Personal Consumption Expenditures Price Index data for May. The PCE Index on a monthly basis is expected to come in at 0.5%, accelerating from 0.4% in April. On a yearly basis, PCE inflation is expected to increase 4.6%, more than the 4.4% rise seen a month earlier.  Both the monthly and yearly Core PCE are seen stable at 0.4% and 4.7%, respectively. . Any bigger jump in PCE, both Core or headline , would strengthen the US Dollar as it would increase the chances of more Fed hikes. Personal Income is expected to increase at a steady pace of 0.4%, while the Personal Spending is expected to decelerate significantly,  from 0.8% to only 0.2%.
• At 13:45 GMT, Chicago Purchasing Managers Index for June is expected to head from 40.4 to 44. An uptick, though still below 50 and thus pointing to a contraction in the region’s business activity. 
• Just 15 minutes later, at 14:00 GMT, the Michigan Consumer Sentiment Index for June will come out, which is expected to remain unchanged at 63.9. Participants for the survey had the opportunity as well to pencil in inflation expectations over the next year and for the next 5-to-10 years. Currently, the one-year inflation forecast is at 3.3%. An uptick or lower number could move the US Dollar in either direction.
• Equities are mixed, with minor gains and losses. In Asia, the Hang Seng is up 0.10% while the Japanese Topix closed down 0.33%. In Europe, the German DAX and the Stoxx 50 are mildly green. US Futures are mixed, with the Dow Jones Industrial below zero but the S&P 500 and Nasdaq futures registering mild gains. 
• The CME Group FedWatch Tool shows that markets are pricing in a 86.8% chance of a 25 basis points (bps) interest-rate hike on July 26. The Fed hike is very much locked in as US GDP numbers showed that the US economy can whistand and endure some more rate hikes. Still, markets are reluctant to price in a second rate hike in the last meetings for 2023.
• The benchmark 10-year US Treasury bond yield trades at 3.85%.. The proof of the US economy being in good health made investors reduce their safe haven positions and pushed US yields higher.  

US Dollar Index technical analysis: USD to end the week with a bang

The US Dollar trades overall very much in the green against the most common currencies, with one or two outliers. No real symmetry to be noticed either as we have seen the past week, when often Asia was weaker while currencies in Central and Eastern Europe were substantially stronger.. Expect for traders to keep their powder dry and see the US Dollar index reside where it is at the moment, near Thursday’s high at 103.40.

On the upside, look for 103.50 as the next key resistance level  in order to lock in some solid support and a safe region where the Dollar index can take a breather before heading higher. The 200-day Simple Moving Average (SMA) at 104.98 is still quite far away. So the intermediary level to look for is the psychological level at 104.00 and May 31  peak at 104.70.

On the downside, the 55-day SMA near 102.67 is up for proving its reliability as a support after being chopped up that much in the last two weeks. A touch lower, 102.50 will be vital to hold from a psychological point of view.  In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.

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.