US Dollar Index: Bears retake the initiative and challenge 102.00

The greenback starts the trading week on the defensive and drags the US Dollar Index (DXY) back to the 102.00 neighbourhood.

US Dollar Index looks to yields, cautious ahead of CPI

The index extends the erratic performance seen in past sessions and revisits the 102.00 area on the back of the better mood in the risk complex and further upside in US yields.

Recent fresh geopolitical effervescence remained unnoticed for the FX galaxy, while market participants appear focused on the release of inflation figures tracked by the CPI later in the week as well as usual chatter around the Fed’s probable next moves on rates for the remainder of the year.

In the US cash markets, the risk-on tone favours the intense selling pressure around bonds and collaborates with the underlying upside bias in yields along the curve.

Nothing scheduled data wise in the US calendar but short-term bill auctions on Monday.

What to look for around USD

The index keeps trading in a choppy fashion on Monday, with occasional bullish attempts so far limited around the 102.70 zone.

Recent weakness in the dollar came in response to the rising perception that inflation might have peaked in April, which in turn supports the idea that the Fed may not need to be as aggressive as market participants expect when it comes to raising the Fed Funds rates.

In the meantime, the Fed’s divergence vs. most of its G10 peers coupled with bouts of geopolitical effervescence, higher US yields and a potential “hard landing” of the US economy are all factors still supportive of a stronger dollar in the next months.

Key events in the US this week: Balance of Trade, Consumer Credit Change (Tuesday) – MBA Mortgage Applications, Wholesale Inventories (Wednesday) – Initial Claims (Thursday) – Inflation Rate, Flash Consumer Sentiment, Monthly Budget Statement (Friday).

Eminent issues on the back boiler: Powell’s “softish” landing… what does that mean? Escalating geopolitical effervescence vs. Russia and China. Fed’s more aggressive rate path this year and 2023. US-China trade conflict. Future of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is retreating 0.22% at 101.94 and faces the next contention at 101.44 (55-day SMA) followed by 101.29 (monthly low May 30) and then 99.81 (weekly low April 21). On the upside, a break above 102.73 (weekly/monthly high June 1) would open the door to 105.00 (2022 high May 13) and finally 105.63 (high December 11 2002).