US Dollar Index: DXY fades recovery below 104.00 on downbeat Fed bets, US inflation eyed

• US Dollar Index struggles to extend the previous day’s corrective bounce off three-week low, snaps two-day winning streak.
• Markets remain nearly sure of witnessing no rate hike from Fed in June but concerns about July stay dicey.
• Bond market moves, challenges to sentiment prod DXY bears ahead of the key US CPI.
• Core CPI will be closely observed as high inflation can allow FOMC to remain hawkish despite no rate hike decision.

US Dollar Index (DXY) remains pressured around 103.60 as it fades the previous two-day winning streak on Tuesday as the key US inflation data looms. That said, the greenback’s gauge versus the six major currencies rose in the last two consecutive days amid the market’s positioning for the Federal Reserve’s (Fed) pause to the rate hike trajectory. However, the recently mixed concerns about the US central bank’s future moves join the challenges to the sentiment to prod the DXY buyers ahead of an important data point for the markets.

It’s worth noting that a study from the San Francisco Fed about the correlation between wage growth and inflation could be cited as the reason for the US central bank to remain less hawkish, which in turn weighs on the DXY, apart from the pre-data anxiety. The survey concluded that wage growth has a very small impact on inflation, which in turn raises doubts about the central bankers’ emphasis on wage cost numbers as a source of information to gauge inflation pressure.

Talking about the latest challenges to sentiment, a trade dispute is developing after the US expands its ban on imports from Xinjiang. China vows to protect China firms against any US sanctions, per Reuters. Recently, Bloomberg released prepared remarks of US Treasury Secretary Janet Yellen’s scheduled Testimony in front of the House Financial Services Committee as she said that the International Monetary Fund (IMF) and the World Bank (WB) serve as important counterweights to nontransparent, unsustainable lending from others, like China.

Elsewhere, global institutions like the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) earlier flagged concerns about the global economic challenges emanating from higher interest rates.

Additionally, the increase in the bets favoring the Federal Reserve’s (Fed) 0.25% rate hike in July also prod optimism and put a floor under the US Dollar Index. It should be noted that the CME’s FedWatch Tool suggests nearly limited scope for the US central bank to act on Wednesday’s Federal Open Market Committee (FOMC).

That said, challenges for the US central bank and grim concerns about the same also prod the US Dollar. Former Fed vice chair Richard Clarida came out with comments that it may be more difficult to get inflation near 2% than in the past 15 years. Further, “Expect a hawkish skip this week,” Former President of Bosteon Federal Reserve Bank, Eric Rosengren, tweeted early Monday.

Amid these plays, US Treasury bond yields and the stock futures struggle for clear directions after rising in the last week, which in turn portrays the market’s cautious mood and put a floor under the DXY due to its haven allure.

Looking ahead, the US Consumer Price Index (CPI) figures for May will be in the spotlight as the Fed decision looms on Wednesday. That said, the market forecasts of witnessing no change in the Core CPI MoM figure of 0.4% gain major attention as softer figures could push back the July rate hike concerns and may not allow the Fed to sound hawkish, which in turn can drown the US Dollar.

Also read: US Inflation Preview: Why the US Dollar is more likely to fall than rise, three scenarios

Technical analysis

While the 21-DMA restricts immediate upside of the US Dollar Index near 103.70, a downward-sloping resistance line from May 31, close to 104.00 at the latest, appears the key upside hurdle for the DXY bulls to cross to retake control.