On Thursday (May 15), during the European trading session, as the market's optimism over the 90-day tariff suspension between the USA and China began to fade, the dollar fell broadly. The USD Index (DXY) gave back most of its gains from earlier in the week, as investors turned to safe-haven currencies like the yen and the Swiss franc.
Although the truce on tariffs initially eased market concerns about an economic recession, MacroHive strategist Benjamin Ford pointed out that the market has "exhausted" the positive effects of the statement.
A report from Bloomberg clarified that the USA did not seek a depreciation of the dollar in trade negotiations, but the dollar still faces pressure due to ongoing market concerns about trade policy fluctuations and a decline in global demand for US assets. AXA Investment Research reiterated its bearish outlook on the dollar, citing persistent Capital Trend inflows into Europe, Asia, and Emerging Markets.
Federal Reserve Chairman Powell warned of the policy challenges posed by supply shocks.
In a highly anticipated speech, Federal Reserve Chairman Powell stated that due to changes in the economic structure, long-term interest rates could remain high. He noted that supply shocks are more frequent in the current environment, which may lead to increased inflation volatility. Powell mentioned that although long-term inflation expectations remain anchored around the Federal Reserve's 2% target, the previous near-zero interest rate policy is unlikely to return.
Since the end of 2024, the Federal Reserve has maintained interest rates in the range of 4.25%-4.50%. Despite a moderation in inflation, Powell did not commit to cutting rates and reiterated the difficulty of balancing inflation control with employment under external pressures like tariffs. He confirmed that the Federal Reserve is reassessing its communication strategy and inflation targets as part of a policy framework review.
The unexpected decline in PPI pulled down bond yields, exacerbating pressure on the dollar.
In April, the Producer Price Index (PPI) in the USA fell by 0.5% month-on-month, far below the expected 0.3%. The core PPI dropped by 0.4%, driven by the largest historical decline in service prices. Wholesale profit margins for Machinery and Autos sales decreased by 6.1%, and trade services plummeted by 1.6%. Weak inflation data dragged Treasury yields lower, with the 10-year Treasury yield falling by more than 5 basis points to 4.477%.
Retail sales in April saw a slight increase of 0.1%, in line with expectations, but lower than the 1.7% increase in March. The number of initial jobless claims remained stable at 229,000. Mixed data strengthened the market's expectations for two rate cuts by the end of the year, with the first cut potentially in October.
Market forecast: The USD Index is under pressure as policy uncertainties limit rebound potential.
(USD Index Daily Chart Source: Easy Forex)
In the short term, due to weak inflation data lowering the likelihood of a Federal Reserve interest rate hike and Powell's warnings complicating the policy outlook, the USD Index may continue to face selling pressure. As safe-haven Capital flows into the yen and Swiss franc, and capital shifts to non-USD assets, traders may still be reluctant to rebuild long positions in the dollar.
The market is facing resistance at the key point of 101.302 and the 50-day moving average of 101.800. Before breaking through these levels, the downside resistance for the USD Index is minimal, with the next target being 99.391.
