US Dollar Index: DXY flirts with yearly peak near 105.00 on hawkish Fed, US soft landing concerns

• US Dollar Index picks up bids to reverse the previous day’s retreat from YTD high.
• Strong US data underpins soft landing concerns, allowing Fed hawks to defend “higher for longer” bias for rates.
• China woes, Fed Beige Book concerns also keep DXY buyers hopeful via firmer yields.
• Multiple Fed speakers in the line for observation, risk catalysts also eyed for fresh impulse.

US Dollar Index (DXY) seesaws near the yearly high, recently reversing the pullback from a nearly six-month peak of 105.02, as bulls keep the reins around 104.85 during Thursday’s early Asian session. In doing so, the DXY cheers the increasing odds of witnessing a soft landing in the US, as well as justifies the hawkish Fed concerns, especially amid upbeat statistics from home and strong yields.

Having witnessed upbeat details of the US Factory Orders, a surprise increase in the US ISM Services PMI offered additional strength to the Greenback the previous day. That said, US ISM Services PMI rose to a six-month high of 54.5 in August versus 52.5 expected and 52.7 prior. Further, the final readings of the S&P Global Composite and Services PMIs eased to 50.2 and 50.5 for the said month compared to the initial estimations of 50.4 and 51.0 in that order. It should be noted that all three major constituents of the ISM Services PMI, namely Employment, New Orders and Prices Paid rose notably beyond the previous readings and helped the US Dollar to reverse early-day pullback. Earlier in the week, the US Factory Orders for July dropped to the lowest since mid-2020 but the details about the orders excluding transport, shipments of goods and inventories were impressive to defend the hawkish Fed bias.

The firmer data allowed Federal Reserve (Fed) Governor Christopher Waller to defend hawkish monetary policy during a CNBC interview and also helped Cleveland Federal Reserve President Loretta Mester to rule out rate cuts. However, Federal Reserve Bank of Boston President Susan Collins cited the risk of an overly restrictive stance on monetary policy to suggest the need for a patient and careful, but deliberate, approach. Even so, the Fed’s Beige Book pushed back expectations of witnessing either a policy pivot or rate cut while stating, “US economic growth was modest amid a cooling labor market and slowing inflation pressures in July and August.” The same propelled the DXY via firmer yields.

Additionally, firmer US inflation expectations, per the 10-year and 5-year breakeven inflation rates from the St. Louis Federal Reserve (FRED) data, also favor the Fed hawks and the US Dollar bulls.

On a different page, downbeat concerns about China, the world’s second-largest economy, also weighed on the sentiment and favored the US Dollar’s haven demand. That said, China’s Caixin Services PMI joined the market’s lack of confidence in the Dragon Nation’s stimulus to spoil the concerns about Beijing. On the same line could be the US-China tension surrounding the trade conditions and Taiwan.

Amid these plays, the US 10-year Treasury bond yields rose to a two-week high of around 4.30% and the two-year refreshed weekly top above 5.0%, which in turn offered notable strength to the US Dollar. Further, the Wall Street benchmark closed in the red for the second consecutive day and favored the Greenback’s haven demand.

Looking forward, multiple Federal Reserve (Fed) speakers are scheduled to deliver speeches and can infuse volatility into the markets, making it more important to watch for the US Dollar traders. Further, the weekly US Initial Jobless Claims and the quarterly readings of Nonfarm Productivity, as well as the Unit Labor Costs for the second quarter (Q2) will also be important to watch for clear directions.

Technical analysis

US Dollar Index buyers keep the reins unless they provide a daily closing beneath the 104.70–65 support confluence comprising May’s peak and a two-month-old previous resistance line.