United States Dollar Index extends recovery from two-month low; trades above 99.50

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, builds on the overnight goodish rebound from the 99.30 area, or the lowest level since June 5, and gains some follow-through traction on Tuesday. The intraday move up lifts the index to a fresh daily high, around the 99.70 region, during the early European session, though it lacks bullish conviction amid the uncertainty over the US Federal Reserve's (Fed) policy path.

Soft US inflation and weak consumer spending data released last week undermined prospects for imminent interest rate hikes by the US central bank. Investors, however, remain worried about inflation risks stemming from higher energy prices, which might force the Fed to adopt a more hawkish stance. Hence, Wednesday's release of FOMC Minutes will be scrutinized closely for more cues about the interest rate trajectory, which, in turn, will play a key role in influencing the near-term trajectory for the DXY.

Analysts at OCBC note that “oil, yields and geopolitics are keeping markets on edge,” but argue that “reduced Fed tightening expectations should keep the USD rangebound and preserve support for carry trades.” They add that this week’s key focus will be the release of the July FOMC minutes, with markets expected to “look for greater clarity on policymakers’ inflation views and the extent of support for keeping rates unchanged, beyond the three regional Fed presidents reportedly favouring higher rates.”

In the meantime, the US-Iran standoff keeps geopolitical risk premium in play, lifting oil prices to an over two-week high and underpinning the safe-haven US Dollar (USD). In fact, US President Donald Trump said that he is not seeking an extension of the Memorandum of Understanding (MoU) with Iran, which expired on Monday. Trump repeated his idea of declaring the Strait of Hormuz as a US territory and warned that he would target Oman if it hindered actions to re-open the strategic waterway.

Meanwhile, a senior Iranian official said that Iran has shifted from a defensive stance to a “fully offensive” ​one, citing the stalemate with the US on talks. The official further warned that Iran will launch “timely and precise” ​attacks to break the blockade unless the US implements the June ceasefire deal in a few weeks. Moreover, Iran-backed Houthis in Yemen escalated their campaign against Saudi Arabia, raising the risk of a broader regional conflict and backing the case for a further USD appreciation.

That said, it will still be prudent to wait for strong follow-through buying before confirming that the DXY has bottomed out in the near-term and positioning for any meaningful recovery. Tuesday's economic docket features Building Permits, Housing Starts, Pending Home Sales and Industrial Production data. This, along with comments from influential FOMC members, could provide some impetus to the USD and produce some short-term trading opportunities later during the North American session.

Technical Analysis

The 100-day Simple Moving Average (SMA) at 99.74 could act as an immediate hurdle ahead of the 100.00 psychological mark, which, if conquered, should pave the way for some meaningful gains. On the flip side, immediate support is pegged near the overnight swing low around 99.30 and is closely followed by the 200-day SMA near 99.19. A daily close below the latter will be seen as a fresh trigger for bearish traders and make the DXY vulnerable to decline further.