US Dollar Index: Sino-American jitters, Fed signals favor DXY bulls near 106.50, US data eyed

• DXY picks up bids to renew weekly high after rising the most in three weeks the previous day.
• Hawkish Fedspeak, US-China tussles underpin the US dollar’s safe-haven demand.
• Lack of negative action from Beijing on Pelosi’s Taiwan visit appears to tame the bulls of late.
• Anxiety ahead of US ISM Services PMI, Factory Orders also propel US Dollar Index.

US Dollar Index (DXY) extends the previous day’s rebound from the monthly low as it refreshes in the intraday top around 106.50 during Wednesday’s Asian session. That said, the greenback’s gauge versus the six major currencies rallied the most in three weeks on Tuesday amid geopolitical tension and hawkish Fedspeak.

While joining the line of the hawkish Fed speakers, St. Louis Federal Reserve President James Bullard reiterated support for the hawkish Fed moves and favored the DXY bulls of late. “Federal Reserve and the European Central Bank may both be able to execute a "relatively soft landing" that avoids a harsh recession for their respective economies as they raise interest rates to rein in inflation,” the policymaker said.

Previously, San Francisco Fed President Mary Daly said that she is looking for incoming data to decide if they can downshift the rate hikes or continues at the current pace, as reported by Reuters. However, Chicago Fed President Charles Evans showed support for a 50 basis points (bps) rate hike for the September policy meeting if inflation does not improve, as reported by Reuters. Furthermore, Cleveland Fed President Loretta Mester, on the other hand, said she does not think the country is suffering a recession, adding that the labor market is in great shape. On inflation, however, she noted that it has not decreased "at all."

It should be noted that the geopolitical tension between the US and China, recently over Taiwan, offers more strength to the US dollar due to its haven appeal. The fears growth stronger tussles among the world’s top-two economies will have more negative consequences for the world amid recession fears. “US House of Representatives Speaker Nancy Pelosi arrived in Taiwan late on Tuesday on a trip she said shows an unwavering American commitment to the Chinese-claimed self-ruled island, but China condemned the highest-level U.S. visit in 25 years as a threat to peace and stability in the Taiwan Strait,” said Reuters.

Not only the Taiwan issue but talks of likely US restrictions on the chip-making machinery’s exports to China also magnified the Sino-American tussles. It’s worth noting that Beijing’s policymakers also showed a lack of confidence in this year’s Gross Domestic Product (GDP) and favored the DXY bulls.

Amid these plays, the Wall Street benchmarks closed negative for the second consecutive day while the S&P 500 Futures print mild losses by the press time. It should be observed, however, that the US 10-year Treasury yields pause the previous day’s rebound from the four-month low and test the US Dollar Index run-up.

Moving on, headlines surrounding China and Fed could direct immediate DXY moves ahead of the US Factory Orders for June and ISM Services PMI for July.

Technical analysis

US Dollar Index pokes a three-week-old descending resistance line around 106.45, a break of which could direct buyers towards the 21-DMA hurdle surrounding 107.00. Meanwhile, the 50-DMA level near 105.10 restricts the DXY’s short-term downside.