USD Index comes under pressure and breaks below 111.00, looks to data

• The index gives away part of Wednesday’s strong advance.
• The risk complex regains some composure and weighs on the dollar.
• US Initial Claims, Fedspeak next of relevance in the calendar.

The USD Index (DXY), which tracks the greenback vs. a bundle of its main rival currencies, faces some downside pressure and slips back below the 111.00 mark on Thursday.

USD Index remains supported around 110.00

The index trades with moderate losses in the sub-111.00 zone in the second half of the week, as the riskier assets regain some balance and US yields so far extend the recovery sparked on Wednesday.

In the meantime, the hawkish message from Fed’s rate-setters remain on the hawkish side and everything points to a 75 bps interest rate hike at the November 2 gathering. This view was reinforced after better-than-expected results from the ISM Non-Manufacturing and the monthly ADP report, both for the month of September and released on Wednesday.

So far, CME Group’s FedWatch Tool sees the probability of such a scenario at nearly 70%.

In the US data space, usually weekly Claims are due along with speeches by FOMC ‘s Governors L.Cook (permanent voter, centrist) and C.Waller (permanent voter, hawk) and Chicago Fed C.Evans (2023 voter, centrist).

What to look for around USD

The index suffers the recovery in the risk complex and returns to the area below the 111.00 level on Thursday.

While the near-term outlook for the dollar looks somewhat dented, the firmer conviction of the Federal Reserve to keep hiking rates until inflation looks well under control regardless of a likely slowdown in the economic activity and some loss of momentum in the labour market continues to prop up the underlying positive tone in the index.

Looking at the more macro scenario, the greenback also appears bolstered by the Fed’s divergence vs. most of its G10 peers in combination with bouts of geopolitical effervescence and occasional re-emergence of risk aversion.

Key events in the US this week: Initial Jobless Claims (Thursday) – Nonfarm Payrolls, Unemployment Rate, Consumer Credit Change, Wholesale Inventories (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Prospects for further rate hikes by the Federal Reserve vs. speculation of a recession in the next months. Geopolitical effervescence vs. Russia and China. US-China persistent trade conflict.

USD Index relevant levels

Now, the index is retreating 0.27% at 110.89 and a breach of 110.05 (weekly low October 4) would open the door to 109.35 (weekly low September 20) and finally 107.68 (monthly low September 13). On the other hand, the next up barrier emerges at 114.76 (2022 high September 28) seconded by 115.00 (round level) and then 115.32 (May 2002 high).