US Dollar retreats ahead of important US data releases

• US Dollar has been struggling to preserve its bullish momentum on Thursday.
• US Dollar Index retreats toward 104.00 from multi-month high it set above 104.50.
• US ADP employment data could impact the US Dollar's valuation.

The US Dollar (USD) has lost its traction after having outperformed its major rivals on Wednesday. The US Dollar Index, which tracks the USD's valuation against a basket of six major currencies, was last seen declining toward 104.00 from the multi-month high it touched above 104.50 mid-week.

The USD's valuation could be impacted by the monthly private sector employment data published by Automatic Data Processing (ADP) in the second half of the day. The US economic docket will also feature a revision to the first-quarter Unit Labor Costs and the ISM's Manufacturing PMI survey for May. In the meantime, investors will be paying close attention to comments from Federal Reserve (Fed) officials before the blackout period starts on Saturday.

Daily digest market movers: US Dollar loses strength as dovish Fed bets return

• Philadelphia Fed President Patrick Harker noted on Wednesday that he was leaning toward a pause in rate hikes in June but noted that incoming data may change his mind.
• Federal Reserve Governor Philip Jefferson said that pausing rate hikes at the next FOMC meeting would offer time to analyse more data before making a decision about the extent of additional tightening. 
• According to the CME Group FedWatch Tool, the probability of one more 25 basis points (bps) Fed rate hike at the upcoming meeting declined below 40% from nearly 70% early Wednesday.
• The House of Representatives passed a bill to suspend the debt limit through January 1, 2025. US stock index futures trade modestly higher on Thursday.
• The US Bureau of Labor Statistics reported on Wednesday that the number of job openings on the last business day of April stood at 10.1 million, compared to 9.74 million in March. This reading came in higher than the market expectation of 9.37 million and provided a short-lasting boost to the USD.
• In an interview with the Financial Times, Cleveland Federal Reserve (Fed) Bank President Loretta Mester said that she doesn't necessarily see a compelling reason for pausing rate increases amid a "really embedded, stubborn inflationary pressure.”
• Previewing the ADP data, "not only have ADP's figures jumped from miss to beat and the other way around, but these differences have also been significant, especially in recent months," said FXStreet Analyst Yohay Elam. "After leaping to the highest level since July 2022 in the latest April publication, the upcoming May report could be weak."
• Consumer sentiment in the US weakened slightly in May with the Conference Board's (CB) Consumer Confidence Index edging lower to 102.3 from 103.7 in April (revised from 101.3). The Present Situation Index declined to 148.6 from 151.8 and the Consumer Expectations Index stayed virtually unchanged at 71.5. Finally, the one-year consumer inflation expectations ticked down to 6.1% in May from 6.2% in April.
• House prices in the US rose by 0.6% on a monthly basis in March, the monthly data published by the US Federal Housing Finance Agency showed on Tuesday. This reading followed February's increase of 0.7% (revised from 0.5%) and came in better than the market expectation of +0.2%.

Technical analysis: US Dollar Index closes in on key support level

The recent action of the US Dollar Index (DXY) confirmed 104.50 as a strong technical resistance in the near term. 104.00 (Fibonacci 23.6% retracement of the November-February downtrend) aligns as key support for DXY and a daily close below that level could open the door for an extended slide toward 103.00, where the 100-day Simple Moving Average (SMA) and the 20-day SMA meet.

On the flip side, buyers could remain interested in case 104.00 stays intact. In that scenario, 104.50 (static level) aligns as first hurdle before DXY could target 105.00 (psychological level, static level) and 105.60 (200-day SMA, Fibonacci 38.2% retracement).

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.