US Dollar Index pares the first daily loss in six around 105.50 as bulls await Fed

• DXY picks up bids to consolidate intraday losses around a two-decade high.
• Fears of aggressive Fed rate hike favor greenback bulls.
• Downbeat US PPI joined cautious optimism surrounding China to trigger pullback.
• US Retail Sales is important but Fed’s ability to tame inflation, keep growth intact will be crucial for clear directions.

US Dollar Index (DXY) trims the daily loss as buyers flex muscles ahead of the key Federal Open Market Committee (FOMC) on Wednesday. That said, the greenback’s gauge versus the six major currencies takes the bids to 105.40 as it reverses the early-day pullback from a 20-year high heading into the European session.

While fresh chatters surrounding the Fed’s aggressive rate hikes could be linked to the latest DXY run-up, as well as preparations to welcome European traders, the market remains dicey and fails to firmly support the US dollar buyers ahead of the Fed’s verdict.

“Investors have dramatically raised their bets that the U.S. Federal Reserve will raise interest rates by 75 basis points (bps) rather than 50 bps on Wednesday, a swing in expectations that has fuelled a violent selloff across world markets,” said Reuters.

As per the latest readings of the CME’s FedWatch Tool, there is a 99% probability for a 75 bp rate increase during today’s meeting. Comments from the US diplomats, suggesting an indirect push to the Fed also seem to keep the DXY firmer. White House (WH) Economic Adviser Brian Deese and National Economic Council Deputy Director Bharat Ramamurti were among the US diplomats who highlighted the inflation woes and showed readiness to battle the same during their interviews with CNN and Bloomberg respectively.

While justifying the cautious mood, the US 10-year Treasury bond yields pare daily losses around 3.44%, down four basis points (bps). It’s worth noting that the US bond coupons refreshed a two-decade high the previous day amid increasing bets over the Fed’s aggressive rate hikes.

Even so, the US Producer Price Index (PPI) readings for May allowed the US bond coupons to retreat from the 11-year high and trigger a pullback in the US dollar.  That said, the US PPI matched 0.8% MoM forecasts, also easing to 10.8% YoY figures versus 10.9% expected and prior readouts. The PPI ex Food & Energy, known as Core PPI, dropped below 8.6% YoY forecasts to 8.3%.

Additionally, upbeat Retail Sales and Industrial Production from China, for May, also challenged the US dollar’s safe-haven demand.

Moving on, the US Retail Sales for May could entertain traders, expected at 0.2% MoM versus 0.9% prior, but major attention will be given to the FOMC. While the Fed rate hike is almost given, the size of the same and the economic forecasts, coupled with Chairman Jerome Powell’s ability to tame inflation and growth fears will be crucial to watch for fresh directions.

Technical analysis

Unless dropping back below May’s top of 105.00, the US Dollar Index remains on the way to challenging an upward sloping resistance line from November 2021, around 106.50 by the press time.