US Dollar Index: DXY grinds at six-week top past 104.00 with Fed hawks in driver’s seat

• US Dollar Index seesaw near multi-day high amid hawkish Federal Reserve bias.
• Upbeat US data propel Treasury bond yields and Fed bets over higher policy pivot.
• Fed officials reaffirm readiness for further rate hikes.
• US-China story adds to the market’s fears and strengthens US Dollar’s haven demand.

US Dollar Index (DXY) prints mild gains around 104.15 as bulls flirt with the six-week high amid early Friday. That said, the hawkish Federal Reserve (Fed) commentary and upbeat US data, as well as the US-China tension, could be considered to play major roles in portraying the DXY’s three-day uptrend.

On Wednesday, the US Producer Price Index (PPI) for January gained major attention as it jumped the most since June with 0.7% MoM figure. Also positive was the improvement in the US Initial Jobless Claims for the week ended on February 10, 194K versus 200K expected and 195K prior. Alternatively, a slump in the Housing Starts for January and the Philadelphia Fed Manufacturing Survey for February seemed to have gained a little attention.

Following the data, St. Louis Federal Reserve's James Bullard and Cleveland Fed President Loretta Mester conveyed their hawkish bias and bolstered the greenback. Among them, the Fed’s Bullard said, “Continued policy rate increases can help lock in a disinflationary trend during 2023, even with ongoing growth and strong labor markets, by keeping inflation expectations low.” Fed’s Mester, on the same line, stated that the Fed will need to go above 5% and stay there for a while. The policymaker also added that she is not ready to say if the Fed needs a bigger rate increase at the next policy meeting but said that she would not want to surprise the markets.

It should be noted that the latest FEDWATCH read from Reuters signals that the interest rate futures market shows US rates could peak close to 5.25% by July before dropping to 5.0% by the end of the year. The same signals a higher policy pivot than the 5.10% peak conveyed by the Fed in the December meeting, which in turn hints at a few more rate hikes from the Fed and favors the US Dollar bulls.

On a different page, the fresh US-China tension and Russia’s refrain from stepping back when it comes to attacking Ukraine also weigh on the risk appetite and the EUR/USD prices, due to the US Dollar’s safe-haven demand. That said, US President Joe Biden fired shots at his Chinese counterpart while conveying the expectations for a talk with the Chinese leader, during an interview with NBC News. “I think the last thing that Xi wants is to fundamentally rip the relationship with the United States and with me," said US President Biden per Reuters.

Against this backdrop, Wall Street closed negative and the S&P 500 Futures dropped 0.30% intraday by the press time. It should be noted that the US 10-year Treasury bond yields rose to the highest levels in 2023 with the latest print of 3.86% while its two-year counterpart also printed mild gains to end the day around 4.64%, making rounds to the highest levels since November 2022.

Given the fresh fuel to the hawkish Federal Reserve concerns, backed by upbeat US data, a light calendar on Friday can keep the DXY bulls in the driver’s seat ahead of the next week’s Monetary Policy Meeting Minutes for the Federal Open Market Committee’s (FOMC) latest move.

Technical analysis

A successful break of the 50-day Exponential Moving Average (EMA) and the three-month-old descending trend line, respectively near 103.80 and 103.60, keeps US Dollar Index buyers hopeful of challenging January’s high near 105.65.