On Thursday, after hitting a new high of 104.95 that was last seen in January 2003, the US dollar index is declining today, at least at the start of the session. At the time of publication, the DXY futures were trading near 104.65.

Besides, some traders probably took profit on long positions on the US dollar on the last trading day of the week. The market also paid attention to the macroeconomic data from the US showing that inflation has slowed down in April.

Thus, the consumer price index (CPI) rose by +0.3% in April (+8.3% in annual terms), exceeding the forecast by +0.2% and +8.1% respectively. Although growth was better than expected, it still slowed down from 1.2% and 8.5% in March.

This was reported by the US Bureau of Labor Statistics on Wednesday. On Thursday, the BLS released a report on the US producer price index showing that the PPI fell from 11.5% to 11.0% in April (in annual terms). The core producer price index (core PPI) declined from 9.6% to 8.8% in April (in annual terms). The data turned out to be worse than expected (10.7% and 8.9% respectively) and lower than in the previous month.

The results suggest that the Fed's aggressive policy has proven to be effective. Nevertheless, inflation in the US continues to rise, albeit at a slower pace.

Fed Chairman Jerome Powell confirmed on Thursday that the central bank's main purpose is to regain control over inflation.Powell once again said that if the economic situation developed in line with expectations, then he would consider it appropriate to raise interest rates by 50 basis points at the next two meetings. "If things come in better than we expect, then we're prepared to do less. If they come in worse than we expect, then we're prepared to do more," Powell said.

But since inflation is still running near 40-year highs, the Fed is likely to stick to a more aggressive approach in the future.

Yesterday, the Senate approved Jerome Powell for a second term as Federal Reserve Chairman. This is another confirmation that the Fed will continue to actively fight accelerated inflation. As long as it remains at its peak levels in the past 40 years, a further rate hike shall be expected.

Since the difference in the monetary policies of the Fed and other major central banks will only increase, the US dollar and, accordingly, DXY is set to rise further. It may soon break through the 105.00 level and head towards the 110.00 mark. This is where the US dollar index futures were trading 20 years ago.

Meanwhile, as the US dollar is gaining ground, gold and, accordingly, the XAU/USD pair is depreciating. As you know, gold produces no return and is mainly used by investors as a hedging tool against risks (inflationary, geopolitical, economic). However, the quotes of the precious metal are extremely sensitive to changes in the monetary policy of the world's largest central banks, primarily the Fed. When interest rates rise, gold prices tend to decline as the cost of purchasing and holding gold increases.

In the current situation, investors seem to consider the Fed's policy first before investing in this precious metal. They even downplay geopolitical and inflationary risks and prefer the greenback as a safe-haven asset.

At the time of writing, XAU/USD was trading near the 1,821.00 level, moving inside the descending channels. The lower boundary of the descending channel is located between 1,800.00 and 1,785.00 on the daily chart. The last time XAU/USD was seen near these levels was in February 2022 when the price surged to a multi-year high of 2,070.00 shortly after. If the downtrend continues, which seems very likely, the next downward targets for gold will be the levels of 1,800.00 and 1,785.00.