US Dollar Index: DXY bulls take a breather around mid-102.00s as banks, China roil sentiment

• US Dollar Index edges higher after rising the most in a week, portrays cautious mood ahead of inflation clues.
• Mixed US data, Fed talks join fears emanating from China data, Country Garden’s missing bond coupon payment to fuel DXY.
• Moody’s, Fitch downgrade multiple US banks, financial institutions and weigh on sentiment, allowing US Dollar to cheer haven allure.
• Italy’s surprise tax on windfall profits of banks adds to the risk-off mood and favors Greenback.

US Dollar Index (DXY) aptly portrays the market’s cautious mood ahead of the top-tier inflation clues from China and the US for further directions after witnessing a heavy risk aversion the previous day. That said, the DXY seesaws around 102.55 amid the early hours of Wednesday’s Asian session following the biggest daily jump in a week, backed by the sour sentiment.

Greenback cheered its traditional haven status and ignored mixed data at home, as well as the unimpressive comments from the Federal Reserve (Fed) officials, to rise in the last two days.

The key risk catalysts are China’s trade numbers and the global banking woes. That said, China's Trade Balance improves in July but the details suggest deteriorating Imports and Exports for the said month, suggesting the economic challenges for the Dragon Nation which already suffers from geopolitical woes. On the same line, India bans drone makers from using Chinese equipment after stopping the imported laptops and computers previously. Also, Chinese real estate giant Country Garden announced missing two dollar bond coupons due on August 6 totaling $22.5 million per Reuters. The news renews fears of bankruptcy among the realtors in China even if the Country Garden has a 30-day grace period to avoid such hardships.

Elsewhere, concerns about rating giant Moody’s downgrading to nine United States banks joined Fitch Ratings’ downgrading of cutting the credit rating and warning about the outlook of a few US financial institutions renewed banking fears. That said, Italy’s announcements of a surprise windfall tax on bank profits exert downside pressure on the Euro and allow the US Dollar to remain firmer.

Recently, the UK’s leading thinktank National Institute of Economic and Social Research (NIESR) flagged concerns about the British recession and challenged the sentiment. However, Bloomberg’s news suggesting the softer ban on Chinese technology companies seems to have tamed the risk-off mood.

Against this backdrop, Wall Street closed in the red with major losses among the bank stocks whereas the US 10-year Treasury bond yields dropped to the weekly low of around 3.98% before bouncing off 4.03% by the day’s end. That said, S&P500 Futures remains mildly offered by the press time.

If we observe the data at home, US Goods and Services Trade Balance for June came in at $-65.5B versus the $-65B expected and $-68.3B prior whereas the NFIB Optimism Index for July improved to 91.9, the highest in nine months, from 91.0 previous readings and 90.6 market forecasts. Further, US IBD/TIPP Economic Optimism for August eases to 40.3 from 43.0 market forecasts and 41.3 prior whereas Wholesale Inventories for June dropped to -0.5% versus the analysts’ estimations of reprinting the -0.3% figures.

Talking about the Fed signals, Philadelphia Federal Reserve Bank President Patrick Harker advocated Fed’s policy pivot while saying, per Reuters, “I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work.” On the other hand, Richmond Fed President Thomas Barkin stated that the Gross Domestic Product (GDP) remained "solid". 

Looking ahead, China’s headline inflation data comprising the Consumer Price Index (CPI) and Producer Price Index (PPI) for July will be crucial for intraday directions. That said, the CPI is likely to tease deflation while posting -0.4% YoY figures versus 0.0% prior whereas the PPI is expected likely to improve to -4.1% YoY from -5.4% prior. Should the inflation in the world’s biggest industrial players drops, the market’s fears escalate and the same can propel the DXY ahead of the US CPI data, up for publishing on Thursday.

Technical analysis

A clear upside break of the 14-week-old resistance line, close to 102.50 at the latest, becomes necessary for the US Dollar Index bulls to keep the reins.