US Dollar Index licks its wounds near 102.00 as DXY traders brace for US GDP, Fed

• US Dollar Index treads water after a volatile day, eyes third consecutive weekly loss.
• US activities shrunk in January even if the PMIs moderated, hawkish ECB concerns also weigh on DXY.
• Fed fund futures signal the policy pivot to be nearer than the US central bank signaled.
• Advances readings of US Q4 GDP are the key ahead of next week’s FOMC.

US Dollar Index (DXY) treads water around 101.90-95 as it struggles to pause late Tuesday’s pullback from 102.43 amid a sluggish Asian session on Wednesday. In doing so, the greenback’s gauge versus the six major currencies portrays the market’s cautious mood ahead of Thursday’s key US growth numbers and the next week’s Federal Open Market Committee (FOMC) monetary policy meeting.

It’s worth noting that the DXY failed to benefit from the sour sentiment on Tuesday amid mixed concerns surrounding the US activity data. That said, preliminary readings of the US S&P Global Manufacturing PMI for January rose past 46.2 market forecast and 46.1 market expectations with 46.8 figure while the Services PMI followed the suit with the 46.6 figure for the said month, versus 44.5 forecast and 44.7 prior. That said, the S&P Global Composite PMI for January increased to 46.6 from 45.0 prior and the 44.7 consensus, marking the seventh consecutive read below 50. 

Following the US data, the US Dollar Index managed to rise for a brief time before closing in the red. The reason could be linked to the comments from Chief Business Economist at S&P Global Chris Williamson who said, “The US economy has started 2023 on a disappointingly soft note, with business activity contracting sharply again in January."

On the other hand, an easing in the market’s favor for the hawkish Fed moves in the next week also weighed on the DXY. “Fed fund futures see only two more quarter-point rate hikes by the Fed to a peak of around 5% by June, before it starts cutting rates later in the year. The Federal Reserve itself has insisted it still has 75 bps of increases in the pipeline,” said Reuters.

Furthermore, the increasing chatters surrounding the European Central Bank’s (ECB) 50 basis points (bps) rate hike in the next week and upbeat Eurozone PMI data also weigh on the DXY. That said, European Central Bank (ECB) policymaker Gediminas Simkus was the latest to back 50 bps rate hike while the first readings of the Eurozone S&P Global Manufacturing PMI crossed the 48.5 market forecasts and 47.8 previous readouts with 48.8 figure for January. Further, the Services PMI also impressed Euro bulls with 50.7 mark versus 50.2 expected 49.8 prior. With this, the Composite PMI for the bloc increased to 50.2 from 49.3 previous readings and 49.8 market forecasts.

Following the data releases, Chris Williamson, Chief Business Economist at S&P Global said, “A steadying of the Eurozone economy at the start of the years adds to evidence that the region might escape recession.”

Looking forward, a light calendar and the absence of the Fed and the ECB talks ahead of next week’s monetary policies could restrict the DXY moves. However, the bears are likely to keep the reins amid bearish bias surrounding the Federal Reserve, as well as the hawkish concerns about the European Central Bank. That said, the first readings of the US fourth-quarter (Q4) Gross Domestic Product (GDP), up for publishing on Thursday, will be crucial to watch for immediate directions. The reason appears logical due to the next week’s Federal Reserve (Fed) meeting, as well as the talks of the US recession. Forecasts suggest the world’s biggest economy eases with 2.8% annualized growth.

Also read: US Gross Domestic Product Preview: Three reasons to expect a US Dollar-boosting outcome

Technical analysis

Unless crossing the previous monthly low surrounding 103.40, the US Dollar is on the way to the latest swing low near 101.50 ahead of challenging the May 2022 bottom close to 101.30.