US Dollar rally tempered to start week, gains expected to continue

• DXY rally sees minor pullback on Monday but is set to continue its upward journey this week.
• Fed maintains that only one rate cut is expected in 2024, conflicting with market expectations.
• US Treasury yields continued rising, gaining more than 1% on Monday.

On Monday, the US Dollar Index (DXY) experienced some pullback but maintained overall strength. Tracking the previous week's performance, the DXY was influenced by the hawkish Federal Reserve (Fed) and the risk-off impulses from Europe. These two driving factors are expected to continue influencing the Index, allowing the US Dollar rally to proceed. It's worth noticing that the Index, on Friday, closed at its highest level since early May and is expected to retest the April-May highs near 106.50.

The US economic outlook persists in a state of ambiguity. The Fed continues to keep its economic indicator projections unchanged but revised its forecast for Personal Consumption Expenditures (PCE) higher. Primarily, soft inflation levels combined with a robust labor market illustrate the mixed dynamic of the US economic landscape.

Daily digest market movers: DXY slightly pulls back after strong week

• Fed perceives only one rate cut in 2024 compared to the market's prediction of two. This discrepancy will be influenced heavily by emerging financial data.
• Investors are awaiting critical reports, namely June's Consumer Price Index (CPI) and PCE, which will be key for timing of interest rate cuts. The odds of a cut at the July meeting remain low at 10%.
• An upcoming cut will also depend on July's CPI and PCE, ahead of the Fed's meeting on September 17-18. The odds for a rate cut at this meeting are currently near 75%.
• US Treasury yields are following an uptrend, with the 2, 5 and 10-year yields reported at 4.47%, 4.30%, and 4.28%, respectively, with large gains.

DXY technical analysis: Bulls pause, outlook still positive

The technical indicators presented a pause in Monday's session but maintained an overall positive standpoint. The Relative Strength Index (RSI) continues to hold above the 50 level, and the Moving Average Convergence Divergence (MACD) continues to present green bars. This implies that the bulls remain strong, which leaves the door open for additional gains.

Furthermore, the DXY remains above its 20, 100 and 200-day Simple Moving Averages (SMA), which combined with investors taking a breather supports a bullish stance for the DXY.