US Dollar holds steady against its major rivals this-week.

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• US Dollar holds steady against its major rivals this-week.
• US Dollar Index fluctuates in a narrow channel near 104.00 for the third straight day.
• US inflation report and Fed’s policy meeting next week could ramp up US Dollar’s volatility.

The US Dollar (USD) stays relatively stable on Wednesday as investors refrain from committing to large positions ahead of next week’s highly-anticipated data releases and central bank policy announcements. The US Dollar Index, which gauges the USD’s valuation against a basket of six major currencies, fluctuate in a tight channel near 104.00 for the third straight day.

May Consumer Price Index (CPI) data from the United States (US) will be watched closely by market participants on Tuesday before the Federal Reserve (Fed) announces the interest rate decision on Wednesday. The Fed will also publish the revised Summary of Projections, the so-called dot plot.

The US Dollar Index (DXY) trades at around 104.00, where the Fibonacci 23.6% retracement of the November-February downtrend is located. In the meantime, the Relative Strength Index (RSI) indicator on the daily chart stays comfortably above 50, suggesting that buyers look to remain in the driver’s seat.

104.50 (static level) aligns as first resistance for DXY ahead of 105.00 (psychological level). A daily close above the latter could bring in additional buyers and open the door for an extended rebound toward 105.60 (Fibonacci 38.2% retracement, 200-day Simple Moving Average (SMA)).

On the downside, bearish pressure could increase if DXY closes the day below 104.00. In that scenario, 103.50 (static level) could be seen as initial support before 103.00 (100-day SMA).

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.

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