DXY: yesterday's results and dollar outlook


Yesterday's trading day turned out to be successful for the dollar: the DXY dollar index rose 68 points against the closing price of the previous trading day, to 103.21 mark.

DXY Chart

On Thursday, the dollar totally strengthened, including against its main competitors in the foreign exchange market, although the beginning of yesterday's trading day was not very successful for the dollar. Market participants were waiting for the results of the ECB meeting and hoped either for an increase in interest rates, or for tough rhetoric from the bank's leaders.

As you know, the ECB leaders on Thursday decided to keep the base rate on deposits at -0.50%, and the key rate at 0%. They also said they intend to raise interest rates by 25 bp. at the July meeting, also planning to complete the Asset Purchase Program (APP) by July 1.

 The euro reacted positively to this decision of the ECB, although it was expected. The DXY dollar index also declined after it, as more than 50% of the 6-currency basket of the DXY dollar index is occupied by the euro.

However, after the ECB press conference, which began 45 minutes after the publication of the rate decision, the euro fell sharply, pulling other currencies with it, and the dollar began to strengthen.

Starting the press conference, ECB President Christine Lagarde said that inflationary pressures have risen and remain undesirably high, which is a serious problem. In her opinion, economic activity will be weakened in the near term by high energy costs, and in Ukraine and recent lockdowns in China have exacerbated problems in the supply chain.

Lagarde also said that after a planned interest rate hike in July, "we (at the ECB) want to see how the markets perform." Economists predict that the consumer price index in the Eurozone will fall to 6.8% this year (now it is at 8.1%), GDP growth will also slow to 2.8% from 3.7%.

Market participants probably considered Lagarde's statements very cautious, not excluding further pauses in the ECB's monetary policy tightening cycle, while the Fed and a number of other major world central banks are actively tightening their monetary policies, including by raising interest rates.

Yesterday, the dollar also received support, caused by the growth of demand for it as a defensive asset, and against the backdrop of US Treasury Secretary Janet Yellen's statement that there is no threat of a recession in the country.

The result of yesterday's very volatile trading day was the strengthening of the dollar and the growth of the DXY dollar index.

Today, during the period from 12:30 to 14:00 (GMT), a significant increase in volatility in USD quotes is expected. Market participants are waiting for the publication of fresh data on inflation in the US. In May, consumer inflation is expected to rise by 0.7% and remain at the level of 8.3% in annual terms, which indicates its high level (highs in 40 years). If the data turns out to be weaker than the forecast, then the dollar is likely to react with a short-term decline. Data better than the forecast will strengthen the dollar.

At 14:00, the University of Michigan consumer confidence index (preliminary release) will be published, reflecting the confidence of American consumers in the economic development of the country. A high level indicates growth in the economy, while a low level indicates stagnation. The data for the previous periods testify to the uneven recovery of this indicator, which is negative for the USD. Data worse than previous values ​​(58.4 in May, 65.2 in April, 59.4 in March, 62.8 in February, 67.2 in January 2022) may negatively affect the dollar in the short term. June forecast: 58.0.