Bears hold the reins at 2-week low around 108.00, US inflation in focus
- US Dollar Index fades rebound off fortnightly low, down for the third day in a row.
- Bearish US inflation expectations and risky market sentiment are weighing on the greenback.
- The absence of Fedspeak, the light calendar adds strength to the downside of the DXY.
- The US CPI should ease in August, but its size is a concern.
The U.S. Dollar Index (DXY) is in a three-day downtrend as it retreats towards 108.00 during Tuesday’s Asian session, dampening the rebound from the two-week low set the previous day. In doing so, the greenback’s gauge against the six major currencies appears to be preparing for the all-important US Consumer Price Index (CPI) data for the month of August.
Ahead of the data, lower US consumer inflation expectations and risk-friendly news from Ukraine, along with a light calendar, appear to favor the DXY bears. In the same vein, there could be the absence of China and the blackout of the Fed for 15 days before the meeting of the Federal Open Market Committee (FOMC) in September.
U.S. consumers saw inflation at 5.75% over the next 12 months in August, down from 6.2% in July, as well as the lowest since October 2021, according to details from the New York Fed Monthly Consumer Expectations Survey released Monday. Other data shared by Reuters suggests three-year inflation expectations marked the slowest pace since the end of 2020, averaging 2.8% from 3.2% reported in July.
Additionally, updates that Ukraine is successfully repelling the Russian military from some of its regions appear to have bolstered the market‘s cautious optimism, although it raised fears of harsh retaliation from Russia. On the same line could be hopes for more stimulus from big economies like China, the US, UK and Europe. Additionally, the latest news from the Wall Street Journal (WSJ) suggesting US gas prices are down for the 13e week in a row also eased market pressure and favored risky sentiment, as well as the price of gold.
It should be noted that the hawkish tone of policymakers at the European Central Bank (ECB) could also be seen as negative for the DXY, especially in the absence of Fedspeak. While many ECB policymakers favored higher rates over the weekend, Vice President Luis de Guindos was the latest to express his optimism, saying: “Any contraction in GDP will be less than during the euro crisis”. The decision maker also mentioned, “I don’t know how much the rates will go up.”
Amid the play, risk sentiment weighed on the US dollar index, as seen by Wall Street’s firmer close, which in turn shrugged off upbeat US Treasury yields. It’s worth noting that US Treasury yields are paring recent gains and S&P 500 futures are posting modest gains at press time.
Looking ahead, the US CPI for August becomes crucial after the latest drop in price pressure. Forecasts suggest the headline figure declines to -0.1% MoM from 0.0% previously, while CPI excluding food and energy is expected to remain unchanged at 0.3% MoM. If the inflation numbers come in weaker, the US dollar might have another dip to follow.
Also Read: US CPI Snapshot: Dollar Set to Rise on Low Core Expectations, Three Scenarios
The first daily close below the 21-DMA, around 108.90 at the latest, in a month takes the US Dollar Index to the end-July high near 107.40.