US Dollar stretches higher with hawkish Fed scaremongering markets

• The US Dollar trades firmly in the green against nearly all major peers. 
• A light data calendar is ahead as markets digest hawkish Fed comments. 
• The US Dollar index flirts with a retest of 105.90.

The US Dollar (USD) trades stronger on Wednesday for the second day in a row with some help from US Federal Reserve (Fed) officials, who seem to have turned more hawkish. Federal Reserve Governor Michelle Bowman lit the fire on the fuzz by saying that a rate hike is still an option while she sees too many potential risks that could still drive inflation higher. Her thesis became reality just a few hours later, after neighbouring country Canada released red-hot inflation numbers.

On the economic front, a rather light calendar ahead of Thursday’s Gross Domestic Product (GDP) final estimate and Friday’s Personal Consumption Expenditures (PCE) Price Index release. Still, traders will need to watch out for the Bank Stress Test report, to be published at 20:30 GMT, in which the Fed analyzes how healthy US banks’ balance sheets are in case of financial market distress. 

Daily digest market movers: Fed scaring markets

• Markets got spooked by comments from Federal Reserve Governor Michelle Bowman on Tuesday, saying she is "willing to raise the target rate at a future meeting if inflation progress stalls or reverses", while she "expects US inflation to remain elevated for some time, still seeing a number of upside inflation risks."
• At 11:00 GMT, the weekly Mortgage Applications Index from the Mortgage Bankers Association (MBA) will release this week’s numbers. The index rose 0.9% the previous week.
• At 14:00 GMT, New Home Sales data for May is due to come out. Analysts expect sales to increase slightly to 640,000 from April’s 634,000. 
• The US Treasury is heading to markets to allot a 5-year Note in the markets at 17:00 GMT. 
• The Fed’s Bank Stress Test report will come out near 20:30 GMT. 
• Equities are recovering after Nvidia (NVDA) was able to eke out gains on Tuesday at the US closing bell. The main indices in Asia are all in the green and even the Dax and the pan-European index, Euro Stoxx 50, is recovering. US futures are rather mixed, with the Dow Jones Industrial futures in the red against Nasdaq futures in the green and the S&P 500 caught in the middle. 
• The CME Fedwatch Tool is broadly backing a rate cut in September despite the recent comments from Fed officials, with odds now standing at 59.5% for a 25 basis point cut. A rate pause stands at a 34.1% chance, while a 50-basis-point rate cut has a slim 6.4% possibility. 
• The US 10-year benchmark rate trades at 4.26%, and trades near the high for this week.  

US Dollar Index Technical Analysis: Stuck in a rut

The US Dollar Index (DXY) is rolling for a second day in a row, though it looks to be sticking to a sideways trend for now. The Greenback seems to be broadly consolidating, with no new highs and no new lows in over five trading days. However, key economic data to be released on Thursday and Friday might move the needle. 

On the upside, the first level to watch is 105.88, which triggered a rejection at the start of May and on Friday last week. Further up, the biggest challenge remains at 106.52, the year-to-date high from April 16. A rally to 107.20, a level not seen since April 2023, would need to be driven by a surprise uptick in US inflation or a sudden hawkish shift from the Fed. 

On the downside, 105.52 is the first support ahead of a trifecta of Simple Moving Averages (SMA). First is the 55-day SMA at 105.23, safeguarding the 105.00 round figure. A touch lower, near 104.66 and 104.48, both the 100-day and the 200-day SMA form a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.