US Dollar rally fades ahead of key US data, Fed policy decisions

The US Dollar (USD) stays on the back foot early Wednesday following Tuesday’s volatile action. ADP private sector employment report for April and the ISM’s Services PMI survey will be featured in the US economic docket ahead of the US Federal Reserve’s (Fed) highly-anticipated policy announcement later in the American session. Market participants will also pay close attention to the performance of regional banking stocks in the US after Tuesday’s selloff.

After having reached its strongest level in three weeks near 102.50 on Tuesday, the US Dollar Index reversed its direction and closed below 102.00, snapping a three-day winning streak. Heavy losses seen in the regional banking stocks amid resurfacing fears over a deepening financial crisis following the collapse of the First Republic Bank triggered a flight to safety. In turn, the benchmark 10-year US Treasury bond yield fell more than 4% and caused the USD to lose its strength.

The Fed is widely expected to raise its policy rate by 25 basis points (bps) to the range of 5-5.25% after the May policy meeting. Investors will pay close attention to the US central bank’s language in the policy statement and will try to figure out whether there will be a pause in the tightening cycle from June.

During the Asian trading hours, the data from New Zealand revealed that the Unemployment Rate stayed unchanged at 3.4% in the first quarter. In the same period, Employment Change was up 0.8%, compared to the market expectation of 0.4% and the annual Labour Cost Index rose to 4.5% from 4.3%. Supported by the upbeat jobs report, NZD/USD edged higher in the Asian session and was last seen trading in positive territory at around 0.6230.

After having lost more than 50 pips on Monday, EUR/USD reversed its direction late Tuesday and registered modestly daily gains. The pair trades in a relatively tight range above 1.1000 early Wednesday.

GBP/USD failed to stage a decisive rebound despite the renewed USD weakness on Tuesday and closed the second straight day in negative territory. The pair edges higher toward the key 1.2500 level in the European morning on Wednesday.

Fueled by the sharp decline seen in the US Treasury bond yields, Gold price surged higher on Tuesday and reached its strongest level since mid-April near $2,020. XAU/USD stays in a consolidation phase slightly below that level on Wednesday.

USD/JPY fell nearly 100 pips on Tuesday and continued to push lower in the Asian session on Wednesday. The Japanese Yen benefits from the risk-averse market environment and the pair was last seen trading at around 136.00, where it was already down 0.4% on a daily basis.

Bitcoin gained more than 2% on Tuesday before settling above $28,500 on Wednesday. Similarly, Ethereum rose 2% and snapped a two-day losing streak. ETH/USD, however, still trades below $1,900.

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