• The Greenback on the backfoot this Tuesday while the US-China trade deal euphoria quickly fades. 
  • Traders see April's US CPI release not really showing inflationary signals after Liberation Day.
  • The US Dollar Index slips back to 101.50 after failing to reclaim the 102.00 level.

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, corrects to near 101.50 ahead of the US trading session on Tuesday. The partial paring back of Monday’s gains comes as traders become wary of the lack of detail on the recent trade deal between China and the United States (US). Besides slashing the tariffs, no forward dates or topics are set, raising questions on what has been discussed, similar to the UK-US trade deal from Thursday. 

Meanwhile, on the economic data front, the US Consumer Price Index (CPI) release for April came in broadly in line of expectations. For now, that feared inflationary shock has not materialized and sees traders carefully consider the possibility of rate cuts from the Federal Reserve. Overnight, Federal Reserve (Fed) Bank President of Chicago Austan Goolsbee warned that even current tariff levels will still have an inflationary impulse, the New York Times reported. That theory does not seem to be translated into the April CPI numbers for now.

Daily digest market movers: Not for now

  • On Monday, President Trump lashed out at the European Union (EU), saying that the US has the upper hand in its trade discussions with the EU. "The European Union is in many ways nastier than China. We've just started with them. We have all the cards. They treated us very unfairly," Trump said at the White House.
  • At 10:00 GMT, the National Federation of Independent Business (NFIB) released its Business Optimism Index for April. The actual number came in at 95.8 compared to the previous 97.4. The expectation was for a 94.5. 
  • The April US Consumer Price Index data came in not really shocking:
    • Monthly headline CPI came in at 0.2%, lower than the 0.3% expected and away from the disinflationary -0.1% in March. The yearly figure came in at 2.3% from the previous 2.4%.
    • The Monthly core CPI came in at as well at 0.2%, just missing the 0.3% estimate and a touch higher from 0.1% in March. The yearly figure is set to remain unchanged at 2.8%.
  • Equities in the US are rallying near 1% with a second sigh of relief, this time on US inflation which has not run out of control in April.
  • The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in June’s meeting at just 8.2%. Further ahead, the July 30 decision sees odds for rates being lower than current levels at 38.6%.
  • The US 10-year yields trade around 4.47%, with traders mulling possible rate cut bets for the Fed after these steady CPI numbers.

US Dollar Index Technical Analysis: Rate gap issues

Warning lights flashing this Tuesday for the US Dollar Index from a pure technical point of view. The fact that the DXY was unable to break 102.00 and closed below the important 101.90 technical level is opening up the door for a harsh retracement back to 100.00. The US CPI release later this Tuesday could be vital to either broaden the rejection with a weaker Greenback or push it firmly above 102.00.

On the upside, the DXY is flirting with a technical rejection against 101.90, which acted as a pivotal level throughout December 2023 and as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024. In case Dollar bulls push the DXY even higher, the 55-day Simple Moving Average (SMA) at 102.29 comes into play. 

On the other hand, the previous resistance at 100.22 is acting as firm support, followed by 97.73 near the low of 2025. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.

US Dollar Index: Daily Chart

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

(This story was corrected on May 13 at 13:04 GMT to say that Headline yearly inflation is 2.3% instead of 2.4%.)

Source: Fxstreet