US Dollar Index bulls struggle below 96.00 despite firmer yields, Fed eyed

US Dollar Index (DXY) seesaws around 95.70 as traders brace for crucial week comprising Fed meeting amid early hours of Monday’s Asian session.

In doing so, the greenback gauge tracks firmer yields, although a bit slowly amid mixed concerns over the covid variant Omicron. In addition to the pre-Fed hawkish mood that propels the US Treasury yields of late, geopolitical fears surrounding Russia’s invasion of Ukraine and inflation fears also favor the US Treasury bond coupons.

That said, US 10-year Treasury yields rose 2.7 basis points (bps) to 1.774%, snapping a three-day decline, as traders anticipate hawkish Fed verdict, amid firmer inflation, during this week’s key meeting.

Expectations of the March rate hike signals from the Federal Open Market Committee (FOMC) take clues from the latest comments from US President Joe Biden and International Monetary Fund Managing Director Kristalina Georgieva. Both these key authorities highlighted inflation fears and praised Fed’s push for tighter monetary policies.

Elsewhere, the US State Department and UK Deputy Prime Minister Dominic Raab both flashed warnings over Russia’s preparations for invading Ukraine, which in turn magnified geopolitical fears.

On the positive side, the recently easing virus numbers from the UK, the US and China hint at easing Omicron fears even as Japan and India do struggle with the virus of late.

Additionally, People’s Bank of China’s (PBOC) efforts to keep the world’s second-largest economy fluid joins hopes of the US stimulus to favor the US stock futures despite firmer US T-bond yields, which in turn tests DXY bulls.

Ahead of Wednesday’s FOMC, Bank of America (BoA) expects the first rate hike to take place in March, with 25 by hikes in each of the next eight quarters. The BoA also said, “We now expect QT to be announced at the June FOMC meeting, with risks skewed earlier to the May FOMC meeting.”

Read: Fed Preview: Three ways Powell could out-dove markets, dealing a blow to the dollar

For now, monthly readings of Markit PMIs from the US will decorate today’s calendar. Given the upbeat expectations versus recently mixed US data, a slight miss by the scheduled PMIs may negatively affect the DXY. However, nothing becomes more important than Wednesday’s Fed meeting. Following that, the US Advances Q4 GDP and PCE Inflation data will also be watched for further clarity on the US central bank’s next move.

Technical analysis

US Dollar Index bulls need a clear upside break of a six-week-old resistance line and 50-DMA, around $96.00 by the press time, to retake controls. Until then, the odds of another pullback to 95.50 can’t be ruled out.