US Dollar Index: US Holiday may prod DXY bulls above 104.00, risk catalysts eyed

• US Dollar Index struggles for clear directions after seven-week uptrend.
• Labor Day Holiday restricts market moves amid a light calendar, mixed sentiment.
• Upbeat US jobs report teases policy hawks even as Fed inaction in September is mostly priced in.
• China stimulus, Sino-American jitters and inflation clues eyed for clear directions.

US Dollar Index (DXY) seesaws around 104.25-30 during a sluggish start of the week’s trading, mainly due to the US Labor Day Holiday and a light calendar in Asia. Even so, the Greenback’s gauge versus the six major currencies defend the seven-week uptrend by staying on the way to an important technical resistance, mainly after Friday’s heavy rebound.

Although a downward revision to the Q2 US GDP growth and softer PMIs prod the DXY bulls, the upbeat prints of inflation clues and mostly impressive employment statistics allowed the US Dollar to close on the positive side for the seventh consecutive week despite marking the lowest weekly gain since early July.

On Friday, the headlines US Nonfarm Payrolls (NFP) rose to 187K in August versus 170K expected and 157K prior (revised) even as the Unemployment Rate marking an uptick to 3.8% from 3.5% market forecasts and previous readings. Further, the Average Hourly Earnings also eased to 0.2% and 4.3% compared to 0.4% and 4.4% respective priors. Additionaly, the US ISM Manufacturing PMI also impressed the US Dollar buyers with the 47.6 figures versus analysts’ estimation of 47.0 versus 46.4 previous readings.

Following the data, Federal Reserve Bank of Cleveland President Loretta J. Mester downplayed the increase in the Unemployment Rate to 3.8% by stating that the level "is still low." The policymaker termed US job market as strong despite recent rebalancing as she spoke at an event in Germany. About inflation, Fed’s Mester acknowledged that progress has been made but noted it remains elevated.

It’s worth noting, however, that China stimulus and the US-China tension are extra filters, apart from the mixed US data, that challenges the DXY moves.

China President Xi Jinping showed readiness for more collaboration with the international players of the services industry after US Commerce Secretary Gina Raimondo warned China as she returned from her trip to Beijing. On the same line, US President Joe Biden also crossed wires during the weekend while showing his disappointment with Chinese President Xi Jinping’s decision to remain absent from the summit of G20 leaders in India.

Elsewhere, China's central bank, namely the People's Bank of China (PBoC), announced a heavy cut to its foreign exchange reserve requirement ratio (FX RRR) to 4% from 6.0% effective from September 15. That said, a slew of China banks cut interest rates on Yuan deposits to ease the pressure from lower mortgage rates announced previously. Among them, ICBC, China Industrial Bank, Agricultural Bank of China and Bank of China (BoC) gained major attention. Additionally, Reuters cited four people familiar with the matter to report that China is likely to step up action to revive the country’s property sector.

Against this backdrop, , the benchmark US 10-year Treasury bond yields have been declining in the last two consecutive weeks after rising to the highest levels since 2007, to 4.18% at the latest. Further, the Wall Street benchmarks also improved in the recent few days, despite Friday’s sluggish closing, while the S&P 500 Futures print mild losses by the press time.

Moving on, a light calendar and the US holiday may allow the DXY bulls to take a breather but the risk catalysts and Wednesday’s US ISM Services PMI will be the key to watch for clear directions.

Technical analysis

A three-month-old descending resistance line, currently around 104.50, appears the key upside hurdle for the US Dollar Index (DXY) bulls.