US Dollar Index looks for direction around 96.70, risk-on improves

The greenback, when tracked by the US Dollar Index (DXY), struggles for direction in the 96.70 zone following some mild improvement in the risk complex.

US Dollar Index keeps looking to geopolitics

The index remains sensitive to events in Ukraine, although recent talks between officials from both parties appear to have opened the door to a negotiated solution in the near term.

US yields have reversed their recent downside and are now attempting a tepid recovery across the curve, always underpinned by the shift in investors’ appetite for risk.

Other than geopolitics, market participants will be closely following the results from the US manufacturing sector today, where the ISM gauge will take centre stage seconded in relevance by the final print from Markit.

What to look for around USD

More broadly, war-led risk aversion continues to bolster the dollar and keep the index well bid on the back of the deterioration in the geopolitical arena. The constructive view of the buck remains underpinned by the current elevated inflation narrative and the probability of a more aggressive start of the Fed’s normalization of its monetary conditions. In the longer run, recent hawkish messages from the BoE and the ECB carry the potential to undermine the expected move higher in the dollar in the next few months.

Key events in the US this week: Final Markit Manufacturing PMI, ISM Manufacturing PMI (Tuesday) – MBA Mortgage Applications, ADP report, Powell’s testimony, Fed’s Beige Book (Wednesday) – Initial Claims, ISM Non-Manufacturing, Factory Orders, Powell’s testimony (Thursday) – Nonfarm Payrolls, Unemployment Rate (Friday).

Eminent issues on the back boiler: Escalating geopolitical effervescence vs. Russia and China. Fed’s rate path this year. US-China trade conflict under the Biden administration.

US Dollar Index relevant levels

Now, the index is losing 0.01% at 96.73 and a break above 97.73 (2022 high Feb.24) would open the door to 97.80 (high Jun.30 2020) and finally 98.00 (round level). On the flip side, the next down barrier emerges at 96.03 (55-day SMA) followed by 95.67 (weekly low Feb.16) and then 95.17 (weekly low Feb.10).