US Dollar Index slides towards 109.00 as inflation concerns, full markets favor DXY bears ahead of Fed

• US Dollar Index takes offers to print three-day downtrend amid pre-Fed consolidation.
• Inflation expectations, US housing numbers allow greenback to brace for hawkish FOMC.
• Risk catalysts, Fed bets keep buyers hopeful of 0.75% rate hike.
• Second-tier data can entertain traders but significant attention will be on central bankers.

US Dollar Index (DXY) began the first full-market day of the week on the negative side as it dropped to 109.40 during Tuesday’s Asian session. In doing so, the greenback’s gauge versus the six major currencies declined for the third consecutive day.

Softer US housing market data joined downbeat inflation expectations to weigh on the DXY amid a sluggish start to the critical week.

That said, the US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped for the third consecutive day to a two-month low near 2.34% by the end of Monday’s North American trading session. More importantly, the 5-year breakeven inflation rate per the FRED data dropped to the lowest levels since September 2021, at 2.44% at the latest. The same raised concerns about the market’s surprise reaction to the hawkish Fed bets. On the same line, the US NAHB Housing Market Index fell for a ninth consecutive month to 46 versus 48 expected and 49 prior.

On the contrary, the CME’s FedWatch tool hints at an 82% chance of the 75 basis points of a Fed rate hike during Wednesday’s monetary policy meeting. Also, the tool signals around 18% odds favoring the full one percent upside in the rate by the Fed.

Not only the hawkish Fed bets but the risk catalysts surrounding China and Europe also should have underpinned the US dollar’s safe-haven demand.

On Monday, US President Joe Biden said, “I'm more optimistic than I have been in a long time.” The national leader also stated that they would get control of inflation. However, US President Biden’s readiness to back Taiwan in case China attacks Taipei and the hawkish hopes for the Fed seemed to weigh on the gold price ahead of the key monetary policy announcements. In response to US President Biden’s comments, China’s Foreign Ministry said on Monday that Beijing “deplores and firmly opposes this and has lodged stern representations.”

Elsewhere, Germany’s Bundesbank said that it expects the German economy to shrink markedly in the autumn and winter months amid reduced or rationed energy consumption, as reported by Reuters.

While portraying the mood, Wall Street closed positive and helped S&P 500 Futures to print mild gains as traders brace for the full markets. Further, the US Treasury yields also remain firmer around the multi-day top.

Technical analysis

Despite the recent pullback, the 21-DMA and an ascending support line from early August challenge the DXY bears around 109.30 and 108.40 in that order. Alternatively, recovery moves need validation from a two-week-old resistance line, around 110.10 by the press time.