US dollar forecast:
- U.S. dollarAs measured by the DXY indicator, traders slip while traders wait for a critical breakout Federal Open Market Committee resolution
- May the United States economic inflation The data increased the possibility of the Fed stalling at the June meeting, but the tightening cycle may not be over yet
- Policy makers’ guidance and macroeconomic forecasts will help determine the USD trading bias in the coming days and weeks
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Most read: S&P 500 Forecast – Bulls are energized after US CPI. Will the Fed play spoiler?
The US dollar weakened, according to the DXY index, on Tuesday amid market caution ahead of the Federal Open Market Committee’s policy announcement on Wednesday. In late afternoon trading, the dollar gauge was down about 0.3% at 103.30, but it was far from the session lows it hit right after the US CPI report went over the wires.
US economic data released in the morning, which showed annual general inflation slowing to 4.0% in May, initially weighed on the greenback by prompting traders to completely rule out a “pause” at this week’s Federal Reserve meeting. However, the backlash in the forex space quickly died down, with traders concluding that the institution could resume hikes in July and keep rates higher for longer.
We will learn more about the outlook for monetary policy tomorrow when the US central bank reveals its decision for June along with its updated summary of the economic outlook. However, traders should pay close attention to the point chart to see how much additional tightening can be expected and to see if policy makers intend to soften their stance next year.
Given the resilience of the US economy and steady core inflation, the point chart could include one or even two hikes of 25 basis points in 2023 and probably no rate cuts until 2024. This optimistic scenario is likely to skew short-term nominal yields to Bullish trend, which led to a sharp rise in the US dollar in the near term.
Conversely, if the Fed refrains from raising rates further than its March estimate and keeps the door open for a less restrictive stance in 2023, all bets are off. This result should be very bearish for both yields and the US dollar.
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Technical analysis in US dollars
In terms of technical analysis, the US Dollar Index has been moving lower since the beginning of the month after failing to push above the medium-term trend line resistance in effect since September last year. However, if the decline accelerates in the coming days and weeks, the initial support extends from 102.40 to 102.15. On further weakness, attention will turn to 101.50.
On the other hand, if buyers regain control of the market and spark an upward shift, the first ceiling to consider is at the psychological level of 104.00 (also trend line resistance). If this barrier is decisively removed, we could see a move towards 104.70, followed by a possible retest of the 200-day SMA.
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