US Dollar Index rebounds to near 107.00 as US Retail Sales data loom

• The US Dollar trades with mild gains to near 106.90 in Tuesday’s early European session.
• The Fed is expected to lower interest rates by 25 bps on Wednesday at the end of its two-day meeting. 
• The US Retail Sales data for November will be released later on Tuesday. 

The US Dollar Index (DXY) posts modest gains to around 106.90 against major currencies during the early European session on Tuesday. Traders will keep an eye on the US November Retail Sales, which are due later on Tuesday. The attention will shift to the Federal Reserve (Fed), Bank of Japan (BoJ), and the Bank of England (BoE) interest rate decision this week. 

The US Fed is likely to cut interest rates for the third time at its December meeting on Wednesday, bringing its overnight borrowing rate down by a quarter percentage point to a range of between 4.25% and 4.50% from its current range of between 4.50% and 4.75%. The markets are now pricing in a nearly 95.4% chance of a 25 basis points (bps) cut at the Fed's December meeting, compared with about a 78% chance a week ago, according to the CME FedWatch tool. 

Traders will closely monitor Fed Chair Jerome Powell's press conference and Summary of Economic Projections (dot-plot) after the meeting. Any signs of hawkish cuts by the US central bank could provide some support to the US dollar against its rivals. "The U.S. dollar has been at the mercy of headlines not only just surrounding what the Fed is going to do but whether it's going to be deemed a hawkish cut," noted Juan Perez, director of trading at Monex USA in Washington, D.C.

S&P Global revealed in its preliminary report on Monday that the US Composite PMI, which takes both the services and the manufacturing business activity into account, came in at 56.6 in December's flash estimate from 54.9. This figure registered the highest level in 33 months. 

Additionally, the Services PMI improved to 58.5 in December from 56.1 in November, above the market consensus of 55.7. On a negative note, the Manufacturing PMI declined to 48.3 in December versus 49.7 prior, weaker than the 49.4 expected. Traders will take more cues from the US Retail Sales data later in the day. If the stronger sales figures showed weaker outcomes, this could weigh on the US Dollar.