US Dollar regathers strength on rising US Treasury bond yields

• US Dollar has regained its traction following Tuesday’s decline.
• The sharp increase seen in US Treasury bond yields provides a boost to USD.
• USD could continue to find demand with investors moving away from risk-sensitive assets.

The US Dollar (USD) has managed to shake off the selling pressure mid-week after having weakened against its major rivals on Tuesday. In the absence of high-impact macroeconomic data releases from the United States (US), rising US Treasury bond yields seem to be helping the USD outperform its major rivals. Furthermore, the USD, as a safe-haven asset, further benefits from the souring market mood. 

The US Dollar Index, which tracks the USD performance against a basket of six major currencies, advanced beyond 102.00 and retraced Tuesday’s pullback.  

Daily digest market movers: US Dollar capitalizes on rising US yields

• Stronger-than-expected Consumer Price Index (CPI) data from the UK revived fears over sticky global inflation and triggered a rally in global bond yields.
• The benchmark 10-year US Treasury bond yield turned north early Wednesday and climbed to its highest level in nearly a month above 3.6%.  
• Wall Street’s main indexes closed virtually unchanged on Tuesday. US stock index futures trade in negative territory ahead of the opening bell on Wednesday.
• St. Louis Federal Reserve President James Bullard told Reuters on Tuesday that interest rates will need to continue to rise in the absence of clear progress on inflation. Bullard further noted that he is still seeing the "adequately restrictive policy rate" at 5.50%-5.75% range and added that is biased to hold rates there for longer until inflation is contained.
• Housing Starts in the US declined by 0.8% on a monthly basis in March following February's increase of 7.3% (revised from 9.8%). In the same period, Building Permits decreased by 8.8%, compared to the market expectation of +1.45%. 
• The data from China showed on Tuesday that the world’s second-largest economy expanded by an annualized rate of 4.5% in the first quarter, much stronger than the 2.9% growth recorded in the last quarter of 2022. This reading also came in better than analysts' estimate for an expansion of 4%. Other data revealed that Industrial Production expanded by 3.9% and Retail Sales rose by 10.6% on a yearly basis, compared to analysts' estimate of 7.4%.
• On Wednesday, the Fed will release the Beige Book. Existing Home Sales and Initial Jobless Claims data will be featured in the US economic docket on Thursday ahead of S&P Global’s Manufacturing and Services PMI surveys on Friday.
• Previewing the Fed’s publication, “since the March 21-22 meeting, the data suggest that activity is slowing, the labor market is softening, and price pressures are easing,” said analysts at BBH. “Notably, supply chains continue to improve. We believe the Beige Book will highlight these trends that support a pause after what is widely expected to be another 25 bps hike whilst leaving the door open for further tightening if needed.”
• Richmond Fed President Thomas Barkin said on Monday that he wants to see more evidence of inflation settling back to target.
• The data published by the US Census Bureau revealed on Friday that Retail Sales declined by 1% on a monthly basis in March. On a positive note, March’s reading of -0.4% got revised higher to -0.2%.
• The University of Michigan’s (UoM) Consumer Confidence Index edged higher to 63.5 in April’s flash estimate from 62 in March.
• The one-year consumer inflation expectation component of the UoM’s survey climbed to 4.6% from 3.6% in March, providing a boost to the USD.
• "Monetary policy will need to remain tight for a substantial period and longer than markets anticipate,” Federal Reserve Governor Christopher Waller said on Friday. Waller further argued that the recent data show that the Fed hasn't made much progress on its inflation goal.
• In an interview with Reuters on Friday, Atlanta Fed President Raphael Bostic noted that recent developments in the US economy were consistent with one more rate hike.
• According to the CME Group’s FedWatch Tool, markets are currently pricing in a more-than-80% probability of a 25 basis points (bps) Fed rate hike in May.

Technical analysis: US Dollar Index eyes an extended rebound

The US Dollar Index trades near the 20-day Simple Moving Average (SMA) currently located at 102.20. In case the DXY closes the day above that level, it could target 103.00 (static level, psychological level) and 103.50 (50-day SMA, 100-day SMA). 

Meanwhile, the Relative Strength Index (RSI) indicator on the daily chart stays near 50, suggesting that sellers refrain from committing to further USD weakness. 

On the downside, 101.50 (static level) align as interim support ahead of 101.00/100.80 (psychological level, static level, multi-month low set on April 14). A daily close below that support area could open the door for an extended slide toward 100.00 (psychological level). 

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.

The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.