US Dollar Week Ahead: USD Looks for Cues from PCE

US Dollar, DXY Index – Outlook:

Fed Chair Powell reiterated the central bank’s hawkish stance..
Key focus is now on US PCE data due Friday – the market is pricing in one more rate hike this year compared with Fed’s projection of two rate hikes.
What is the outlook on the US dollar and the key levels to watch?

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The US dollar could remain in a range ahead of the key US PCE price index data due Friday. Will the Fed’s preferred inflation gauge could move the needle for markets, which are not convinced that the Fed can hike twice more this year?

The US Federal Reserve too remains data dependent, focusing on evolving economic activity and inflation data. This was echoed by Chicago Fed President Austan Goolsbee at a Wall Street Journal forum, saying the central bank was in a “wait and see” mode as further data come in.

In his testimony to lawmakers on Capitol Hill earlier in the week, Powell reiterated the central bank’s hawkish stance saying more rate hikes may be needed, adding that interest rates would move at a “careful pace” from here. “We’re at least close to where we think our destination is…”, said Powell at a hearing before the Senate Banking Committee on Thursday.

US Dollar Index (DXY) Weekly Chart

Chart Created by Manish Jaradi Using TradingView

Powell added a bit more colour on the June skip, saying “the point” of holding rates steady was precisely to slow the speed with which the Fed was raising borrowing costs. Separately, Fed Governor Michelle Bowman said on Thursday that further rate increases were needed, indicating at least two more hikes are warranted.

DXY Index Daily Chart

Chart Created by Manish Jaradi Using TradingView

The Core PCE Price Index is seen flat at 4.7% on-year, while the PCE Price Index is expected to have eased to 3.8% on-year in May from 4.4% in April. Aside from the inflation data, converging monetary policy outlooks (as global central banks remain in tightening mode) and resilience of the global economy leaves very little relative advantage, keeping currencies in tight ranges.

On technical charts, the DXY appears to be consolidating within a triangle since February. The upper edge of the triangle is a downtrend line (now coming in at about 104.50). The lower edge is an upward-sloping trendline (now at about 101.25), near the April low of 100.80.

DXY Index 240-minute Chart

Chart Created by Manish Jaradi Using TradingView

Zooming in on the intraday charts, any break above immediate resistance at 102.50-103.25, including the 89-period moving average, Tuesday’s high 102.80, and the upper edge of the Ichimoku cloud on the 240-minute charts would further reaffirm the triangle pattern.

Triangles are generally continuation patterns, that is, they eventually resolve in the resumption of the prior trend. In this case, the prior trend has been down. However, at times, triangles can serve as reversal patterns, leading to a change in the prior trend.

Two developments raise the probability of an eventual move lower – the shallow rebound in February, which truncated around 38.2% retracement of the Q4-2022 fall, and the drop below the lower edge of the Ichimoku cloud on the daily charts. Any break from the triangle could trigger a move of 4.50 points, based on the width of the pattern.