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US Dollar Slips as Rate Cut Bets Rise: Potential Trading Opportunity Lurks at 104

Published 03-06-2024, 04:09 pm

Recent economic data in the US is fueling expectations of interest rate cut later this year, despite cautious statements from Fed officials. This shift in sentiment has put downward pressure on the dollar index throughout May.

The key data point influencing market expectations was the slower-than-expected rise in core PCE (personal consumption expenditures) price index for April, a key inflation indicator for the Fed. This, coupled with decreased personal spending and income growth in the US, suggests easing inflationary pressures. As a result, the dollar index lost around 1.5% against major currencies in May.

However, the Fed's 2% inflation target remains unachieved, and some Fed members like Neel Kashkari of Minneapolis advocate for holding rates steady until the inflation target is met. The Fed is caught between market pressure to cut rates and the need to maintain price stability.

Meanwhile, the ECB is likely to cut interest rates this week. While this move is already priced into the EUR/USD, investors will be closely watching ECB President Lagarde's comments for any hints on the future pace of tightening.

In Japan, the Finance Ministry confirmed intervening in the USD/JPY market last month to curb its sharp depreciation. This intervention highlights the challenges central banks face in managing their currencies amidst global economic uncertainties.

US Dollar Steadies but Big Moves Likely Later This Week

The dollar index (DXY) has shown surprising calmness in recent weeks. After dipping to 104 in early May, it partially recovered while maintaining its upward trend for 2024.

Interestingly, this latest downward movement only reached the 0.382 Fibonacci retracement level. This suggests strong support for DXY around 104.25. On the upside, however, resistance has emerged at 105.1.

DXY Price Chart

If the dollar continues its moderate climb and breaks through the 104 support level, the index could retreat to 102. However, a potential interest rate cut in the Eurozone might limit this downside. A series of cuts could weaken the euro compared to the dollar due to the widening interest rate differential.

Looking ahead, the focus shifts to US data and rhetoric. A hawkish stance could push DXY past the 105 resistance, potentially reaching 106.5 and aligning with the 2024 swing highs.

This week's key data points in the US include ISM PMI figures, while the nonfarm payrolls data on Friday will be particularly impactful on market sentiment.

In the Eurozone, the ECB's interest rate decision and accompanying statement will be another critical event to watch.

Euro Remains Quiet Ahead of Interest Rate Decision

Market participants have already priced in the ECB starting to cut rates this month, well ahead of the Fed. The market also expects the ECB to cut more than the Fed this year. This is a solid argument for the euro to remain weaker against the dollar throughout the year.

The comments of ECB officials will be decisive for the direction of the euro. So much so that while the discount is certain, clues will be sought from Lagarde's statements for the moves in the coming months. Economic data on the Eurozone may be compelling for the ECB to readjust interest rates.

EUR/USD Price Chart

In light of these developments, EUR/USD, which started the week horizontally just below 1.085, continues to remain above the main support of 1.08. On the upside, the 1.087 level, where the recovery stopped in the second half of last month, stands as the current resistance point.

If there are hawkish statements From Lagarde in response to the interest rate cut to be announced on Thursday, this may lead EUR/USD to test the 1.087 resistance. In case of a possible breakout, we may see the next move towards the second resistance zone at 1.093.

On the other hand, moderate statements are likely to bring weakness to the euro, while the loss of 1.08 support could extend the downward momentum towards the 1.07 band.

Japanese Yen Intervention Confirmed

Data released by Japan's Finance Ministry on Friday confirmed market intervention at the beginning of May when USD/JPY fell sharply. The ministry announced an intervention of 9.79 trillion yen worth $62.23 billion in the foreign exchange market to support the yen.

Thus, it was seen that the intervention took place when the yen was at a 34-year high of 160 against the dollar. As May began, the Japanese Ministry of Finance intervened in the market by selling dollars in two rounds and the pair fell 5.2% from its peak level in the first week of May to 151.86.

USD/JPY Price Chart

After the intervention, the yen depreciated again, while the USD/JPY pair rose as high as 157 by the end of the month. While the uptrend in USD/JPY remains valid, the 157 level stands as the closest support, while just below 156.22 will be followed as the second support zone this week.

Depending on the possible strengthening in the dollar, the resistance level in USD/JPY remains around 158.5, while pricing above this value may increase concerns that Japanese authorities may intervene in the market again and a horizontal course close to the resistance zone can be observed in the pair.


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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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