US Dollar Index turns positive above 92.50 ahead of FOMC

The greenback regains some buying interest and manages to reverse the recent weakness, lifting the US Dollar Index (DXY) back above the 92.50 mark on Wednesday.

US Dollar Index looks to the Fed

After two consecutive daily pullbacks, including Tuesday’s multi-day lows around 92.30, the index embarks on a recovery to the 92.50/60 band following the opening bell in the old continent.

The leg higher in the dollar appears sponsored by the bounce in yields of the key US 10-year note to levels beyond 1.25%, all within the multi-session consolidative theme.

In the meantime, the cautious stance is poised to prevail among market participants and the dollar in light of the upcoming FOMC event, where QE tapering, inflation, employment and the general performance of the US economy are expected to be in the centre of the debate.

Additional data in the US docket include the weekly MBA Mortgage Applications, advanced Goods Trade Balance figures and the EIA’s weekly report on US crude oil supplies.

What to look for around USD

DXY eased some ground in response to the better mood in the riskier assets. It is worth recalling that despite testing the area above the 93.00 mark in several sessions, the index still failed to close above it on a daily basis. In the very near term, the dollar is expected to move into a consolidative phase as markets get closer to the key FOMC event (Wednesday). In the meantime, bouts of risk aversion in response to coronavirus concerns, the solid pace of the economic recovery, high inflation and prospects of earlier-than-expected QE tapering/rate hikes remain factors supportive of further upside in the dollar.

Key events in the US this week: FOMC meeting, Powell’s press conference (Wednesday) – Flash Q2 GDP, Initial Claims, Pending Home Sales (Thursday) – PCE/Core PCE, Personal Income/Spending, Final July Consumer Sentiment (Friday).

Eminent issues on the back boiler: Biden’s multi-billion plan to support infrastructure and families. US-China trade conflict under the Biden’s administration. Tapering speculation vs. economic recovery. US real interest rates vs. Europe. Could US fiscal stimulus lead to overheating?

US Dollar Index relevant levels

Now, the index is gaining 0.11% at 92.57 and a break above 93.19 (monthly high Jul.21) would open the door to 93.43 (2021 high Mar.21) and finally 94.00 (round level). On the other hand, the next down barrier comes in at 92.31 (weekly low Jul.27) followed by 92.00 (monthly low Jul.6) and then 91.51 (weekly low Jun.23).