US Dollar Index: DXY bears attack 103.00 on hopes of softer United States inflation

• US Dollar Index remains depressed for the second consecutive day around seven-month low.
• Dovish comments from Federal Reserve officials, mixed United States data rekindle hopes of policy pivot and weigh on DXY.
• Risk-on mood, hawkish comments from European Central Bank (ECB) policymakers also exert downside pressure on US Dollar Index.
• Expectations of a softer US Consumer Price Index favor DXY bears.

US Dollar Index (DXY) holds lower grounds near 103.10-15 as traders keenly await the United States Consumer Price Index (CPI) data during early Thursday. In doing so, the US Dollar’s gauge versus the six major currencies justifies the recently downbeat comments from the Federal Reserve (Fed) officials, as well as risk-positive headlines from China, not to forget previously softer US data.

Federal Reserve officials favor US Dollar Index bears

Although the Federal Reserve (Fed) policymakers refrained from providing any clear bearish signals, their hesitance in openly conveying the hawkish bias push traders towards expecting a softer interest rate hike and policy pivot in 2023. The same weigh on the US Dollar Index after the greenback’s gauge cheered the Fed’s hawkish moves in the last year.

That said, Federal Reserve’s Boston representative Susan Collins reiterated her support for the smaller rate increases. The policymaker said that she leans at this stage to a 25 bps hike. However, she also mentioned that it is very data-dependent. Previously, Fed Chair Jerome Powell's comments at Riksbank's International Symposium on Central Bank Independence couldn’t offer further clarity on the US central bank’s monetary policy outlook and raised dovish expectations.

On the contrary, the European Central Bank (ECB) officials have been too hawkish of late, which in turn allows the Euro to remain firmer and shift funds from the US Dollar. Among the ECB hawks, Robert Holzmann, Francois Villeroy de Galhau and Olli Rehn were the latest ones to propel the bloc’s currency and weigh on the DXY.

United States data hasn’t been too helpful to DXY

Having witnessed downbeat United States activity numbers and sluggish wage growth last Friday, the recent second-tier figures have also been mixed and exerted downside pressure on the US Dollar Index. On Tuesday, the US NFIB Business Optimism Index for December dropped to the lowest levels since 2013 if ignoring multiple jitters during the global Covid wave. Further, US Wholesale Inventories also remained unchanged with 1.0% growth for November.

US Treasury bond yields, China news weighs on US Dollar Index

Apart from what’s already stated above, downbeat US Treasury yields and the risk-positive headlines surrounding China also favor the US Dollar Index bears, mainly due to the greenback’s haven appeal. That said, That said, the US 10-year Treasury yields dropped nearly eight basis points (bps) 3.54% while Wall Street closed in the green. Further, China’s total reopening and early signals of heavy holiday shopping join the chatters that the People’s Bank of China (PBOC) will adhere to rate cuts in 2023 to spread the Beijing-inspired optimism.

United States Inflation is the key

Moving on, DXY traders should pay attention to the Consumer Price Index (CPI) details for December for clear directions. Market forecasts suggest the headline CPI to ease to 6.5% YoY versus 7.1% prior while the Core CPI, namely the CPI ex Food & Energy, is likely to drop to 5.% YoY versus 6.0% prior. It should be noted that the talks of the Fed’s policy pivot could gain momentum if the US inflation numbers are softer.

Also read: US December CPI Preview: EUR/USD and USD/JPY are pairs to watch

US Dollar Index technical analysis

US Dollar Index retreats from a one-month-old previous support line, as well as the 21-bar Simple Moving Average (SMA), while bracing for the weekly loss.

In doing so, the DXY fades the week-start bounce off the 102.94 level, which initially took clues from the oversold conditions of the Relative Strength Index (RSI) line, placed at 14.

That said, the sluggish signals from the Moving Average Convergence and Divergence (MACD) signals hint at the US Dollar Index traders’ indecision.

However, failure to keep the earlier corrective bounce and a U-turn from the aforementioned key hurdles, namely the ascending trend line from mid-December and the 21-SMA, keeps the DXY bears hopeful of witnessing a fresh multi-month low, currently around 102.95.

In that case, the 61.8% Fibonacci Expansion (FE) level of the DXY’s moves between November 21 and January 06, around 102.85, gains major attention.

Following that, a southward trajectory towards the 102.00 round figure and a May 2022 low of 101.30 can’t be ruled out.

On the contrary, 21-SMA restricts immediate recovery moves of the US Dollar Index to around 103.35 ahead of the support-turned-resistance line, near 103.45.

Should the DXY buyers manage to cross 103.45, multiple hurdles around 104.00 and 104.60-65 can challenge the upside momentum before highlighting the monthly top of 105.62.

Overall, the US Dollar Index is likely to remain bearish but the downside room appears limited.

DXY: Four-hour chart

Trend: Further downside expected