US Dollar Index looks to extend upside above 96.00

The US Dollar Index (DXY), which gauges the greenback vs. a bundle of its main competitors, trades within a narrow range just above the 96.00 yardstick at the beginning of the week.

US Dollar Index focuses on geopolitics, yields

The index looks to extend higher for the third session in a row within a context favourable to the safe haven universe, and against the backdrop of rising cautiousness in light of the Russia-US standoff around Ukraine.

The US cash markets also remain vigilant, with yields navigating a narrow range and close to recent peaks. The strong rebound in US yields following higher-than-expected US inflation figures in January and prospects of a tighter Fed’s rate path this year appear to be taking a breather as geopolitical factors continue to dictate market sentiment.

Talking of sentiment – the dollar managed to continue rising after the US U-Mich Index, which tracks consumer sentiment, posted an 11-year low on Friday.

Nothing is scheduled in the US docket on Monday, and attention is expected to remain focused on the publication of the FOMC Minutes and Retail Sales, both due later in the week.

What to look for around USD

Higher-than-expected US inflation figures lent extra oxygen to the greenback and propelled DXY back above the 96.00 yardstick last week. However, the extent and duration of this improvement in the dollar remains to be seen, as much of the current elevated inflation narrative was already priced in by market participants as well as the probability (bigger now) of a 50 bps rate hike by the Fed (instead of the more conventional 25 bps move). Looking at the longer run, and while the constructive outlook for the greenback appears well in place for the time being, recent hawkish messages from the BoE and the ECB carry the potential to undermine the expected move higher in the dollar in the next months.

Key events in the US this week: Producer Prices (Tuesday) – MBA Mortgage Applications, Retail Sales, Industrial Production, NAHB Index, FOMC Minutes (Wednesday) – Building Permits, Housing Starts, Initial Claims, Philly Fed Manufacturing Index (Thursday) – CB Leading Index, Existing Home Sales (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. Debt ceiling issue.

US Dollar Index relevant levels

Now, the index is gaining 0.10% at 96.12 and a break above 96.25 (high Feb.3) would open the door to 97.44 (2022 high Jan.28) and finally 97.80 (high Jun.30 2020). On the flip side, the next down barrier emerges at 95.17 (weekly low Feb.10) followed by 95.13 (weekly low Feb.4) and then 94.62 (2022 low Jan.14).