US Dollar Index oscillates near 106.50 as yields, cautious optimism probe DXY bulls

• DXY fades bounce off monthly low as bulls await fresh clues.
• Hawkish Fedspeak, upbeat US data jostle with China numbers, market’s preparations for NFP.
• Firmer equities and recession fears also seem to weigh on the quote.
• US trade numbers, US-China tussles over Taiwan will be important for fresh impulse.

US Dollar Index (DXY) remains depressed around 106.50, after reversing from the weekly top, as traders await clear directions amid Thursday’s sluggish session.

While portraying the mood, the Wall Street benchmarks closed with notable gains but the S&P 500 Futures print mild losses at the latest. Further, the US 10-year Treasury yields remain pressured at around 2.71%, down three basis points (bps) by the press time.

The DXY’s previous strength could be linked to the US-China tussles over Taiwan. However, China’s firmer Caixin Manufacturing PMI weighed on the DXY by improving sentiment and cutting down on the greenback’s haven demand. On the same line could be the firmer prints of equities amid solid earnings.

It’s worth noting that the upbeat prints of US data and hawkish Fedspeak joins recession fears to put a floor under the DXY prices. US ISM Services PMI for July rose to 56.7 from 55.3 prior and the market expectation of 53.5. On the other hand, the Final reading of the US S&P Global Services PMI for July dropped to 47.3, marking the first contraction in two years, from 52.7 in June and the flash estimate of 47.

Elsewhere, St. Louis Federal Reserve Bank President James Bullard said, “(There is) still some ways to go to get to a restrictive monetary policy." The policymaker adds that he still wants to get to 3.75 to 4% this year while showing a preference for the type of frontloading.

Other than Fed’s Bullard, Fed Minneapolis President Neel Kashkari and Richmond Fed President Thomas Barkin also joined the league of the Fed hawks to exert downside pressure. However, San Francisco Fed President Mary Daly appeared to have flashed mixed signals and tamed the DXY bulls afterward. The policymaker said, "Markets are ahead of themselves in expecting rate cuts next year."

Moving on, the US Good and Services Trade Balance for June, expected $-80.1B versus $-85.5B prior, will join the weekly Initial Jobless Claims, expected 259K versus 256K prior, to decorate the calendar. However, significant attention will be given to the headlines surrounding the US-China tension over Taiwan, the recession and the Bank of England’s (BOE) ability to tame inflation and defend the growth prospects.

Technical analysis

A successful upside break of the three-week-old falling wedge bullish chart pattern, currently between 106.20 and 104.75, appears necessary to lure DXY bulls. That said, the 50-DMA and lower line of the stated wedge, around 105.20 and 104.75 in that order, could restrict the US Dollar Index downside during the pullback moves.