US Dollar Index retreats from 20-year high as yields brace for Fed meeting

• DXY consolidates recent gains around multi-year high, snaps four-day uptrend.
• Hawkish Fed concerns keep buyers hopeful ahead of Wednesday’s FOMC.
• US 10-year Treasury yields ease from the highest levels since late 1998 amid sluggish session.
• US PPI for May, China covid updates may offer immediate clues but Fed-related chatters remain in the driver’s seat.

US Dollar Index (DXY) bulls take a breather after refreshing a two-decade top, dropping back to 105.00 during early Tuesday morning in Europe, amid the market’s positioning for Wednesday’s Federal Open Market Committee (FOMC).

That said, the greenback gauge tracks the US Treasury yields while snapping a four-day uptrend near the multi-year high.

The benchmark US 10-year Treasury bond yields pare recent gains around 3.36%, down 1.1 basis points (bps) from the highest levels since April 2011, marked the previous day.

The pullback in yields contradicts the recently firmer chatters surrounding the Fed’s 75 bps rate hike.

It’s worth noting that the US rate futures imply a 96% chance of the Fed raising rates by 75 bps at the June meeting, versus not more than 30% a few days back.

Also likely to have favored the DXY, but could not, are the covid woes in China. Beijing covid cases hit a three-week high, per Bloomberg, which in turn propels the virus woes and should have underpinned the US dollar’s safe-haven demand. “The city recorded 74 infections for Monday, the most since May 22, when Beijing saw a record number of cases for the current outbreak,” said Bloomberg.

Alternatively, Global Times raised expectations of easing US-China tension as it said, “Senior Chinese diplomat Yang Jiechi held talks with US National Security Advisor Sullivan in Luxembourg. The two agreed to reduce misunderstanding and miscalculation, and properly manage differences, saying it is necessary & beneficial to keep communication channels open.”

Above all, DXY traders brace for the Fed meeting with high hopes and a likely 75 bps move.

On an intraday basis, the US Producer Price Index (PPI) for Apri, expected 10.9% YoY versus 11.0% prior, could entertain traders.

Technical analysis

Although overbought RSI conditions seem to have triggered the DXY pullback, the downside remains elusive until the quote stays beyond May’s low surrounding 101.30. That said, an upward sloping resistance line from November 2021, close to 106.50 at the latest, lures the bulls.