US Dollar Index steadies above 104.00 as firmer yields, fears of services inflation probe DXY bears

• US Dollar Index remains depressed after downbeat start of the month.
• Economic recovery hopes from China join the absence of major geopolitical negatives to favor DXY bears.
• Mixed US data, upbeat yields join hawkish Fed talks to tease US Dollar buyers.
• Second-tier US data, risk catalysts are crucial for fresh impulse.

US Dollar Index (DXY) struggles to regain upside momentum during early Thursday, following a downbeat performance the previous day. That said, a light calendar and a lack of moves elsewhere allow the greenback to extend the consolidation of the biggest monthly gain in five.

The greenback’s gauge versus the six major currencies dropped the previous day, following the strongest monthly run-up since September 2022, as China-inspired risk-on mood joined recently easy US data. However, the details of the US statistics join comments from the Federal Reserve (Fed) officials to highlight the inflation fears and keep the hawkish Fed bets on the table, which in turn challenge the DXY bears.

On Wednesday, the US ISM Manufacturing PMI details renew inflation fears as the headline gauge rose to 47.7 in February from 47.4 prior, versus the 48.0 expected. However, the PMI details suggest that the Prices Paid and New Orders marked the highest figures in five and four months respectively.

Elsewhere, Minneapolis Federal Reserve (Fed) President Neel Kashkari said, "Wage growth is now too high to be consistent with 2% inflation." The policymaker also added and noted that it is concerning that the Federal Reserve's rate hikes so far have not brought down service inflation.

It should be noted that strong prints of China’s Caixin and NBS Manufacturing PMIs for February join the Non-Manufacturing PMI for the said month to trigger the market’s optimism on Tuesday, which in turn weighed on the US Dollar’s haven demand.  Following the data, China Finance Minister Liu He showed readiness to bolster the nation’s fiscal spending while also mentioning that the foundation of China's economic recovery is still not stable.

Against this backdrop, the US 10-year Treasury bond yields rose to the highest levels since early November 2022 by poking the 4.0% mark whereas the two-year counterpart rallied to the June 2007 levels by piercing the 4.90% mark. The jump in the US Treasury bond yields suggests the market’s fears of inflation and recession, which in turn probed bulls on Wall Street and weigh on S&P 500 Futures of late, signaling a rebound on the US Dollar.

Moving ahead, a lack of major data/events may restrict DXY moves ahead of Friday’s US ISM Services PMI, which becomes the key amid fears of strong services inflation.

Technical analysis

A clear downside break of the 104.85-90 support-turned-resistance comprising the one-month-old ascending trend line and the 200-day EMA keeps the US Dollar Index bears hopeful.