US Dollar Index rebounds near 108.50, focus on US Core PCE Inflation, Fed’s Powell

• US Dollar Index bears take a breather ahead of the key data/events.
• Shift in market’s mood adds filters to the trading momentum.
• Firmer sentiment, US data and cautious Fedspeak favored bears in the last few days.
• Fed’s preferred inflation gauge, Powell’s speech at the Jackson Hole will be crucial for fresh impulse.

US Dollar Index (DXY) consolidates the recent losses around the mid-108.00s as traders brace for the week’s key data/events during Friday’s Asian session. Also helping the greenback’s gauge versus the six major currencies are the headlines surrounding China and Iran, as well as a light calendar ahead of the all-important US session.

With the US suspending 26 Chinese carrier flights in response to China's action, per Reuters, the Sino-American tension renews and underpins the US dollar’s safe-haven demand. On the same line could be Taiwan’s increased military budget and a jump in the number of US diplomats visiting Taipei. Furthermore, a letter got viral quoting US President Joe Biden as saying, “The US struck Iran-backed forces in Syria in order to safeguard American civilians both at home and abroad,” which also challenged the previous risk-on mood.

It should be observed that China’s near one trillion stimulus and mildly firmer US data, as well as Fedspeak, favored the DXY sellers. Also, a holistic approach by the domestic institutions to safeguard the world’s second-largest economy renewed market optimism earlier.

US data and Fedspeak also exerted downside pressure on the US Dollar Index. Talking about the data, the second estimate of the US Gross Domestic Product (GDP) Annualized improved to -0.6% in the second quarter (Q2) versus -0.9% flash estimations and -0.8% market forecasts. Further, US Initial Jobless Claims dropped to the lowest levels in seven weeks, to 243K for the week ended on August 19 versus 253K expected and a revised down prior of 245K.

Elsewhere, Kansas City Fed President Esther George said on Thursday, "For the near-term thinking about higher interest rates seems reasonable to me." The policymaker also mentioned that (it’s) too soon to say what to expect in September (as) more key data coming. Philadelphia Fed President Patrick Harker was on the same line while he noted, per Reuters, that he wants to see the next inflation reading before deciding on the September rate decision but added that a 50 basis points rate hike would still be a substantial move. Further, Philadelphia Fed President Patrick Harker noted on Thursday that he wants to see the next inflation reading before deciding on the September rate decision but added that a 50 basis points rate hike would still be a substantial move, per Reuters.

Amid these plays, Wall Street marked the biggest daily jump in a week while the US 10-year Treasury yields dropped back to 3.03%, after rising to 3.10% the previous day. That said, the S&P 500 Futures drops 0.10% intraday by the press time.

Although the DXY prints gains, it remains on the way to posting the second weekly gain. However, it all depends upon how well Fed Chairman Jerome Powell could defend the hawkish moves at the annual Jackson Hole speech. Also important will be the US Core Personal Consumption Expenditure (PCE) Price Index for July, the Fed’s preferred inflation gauge. Forecasts suggest that the YoY print is to ease to 4.7% from 4.8% while the monthly figures may drop to 0.3% while 0.6% prior.

Technical analysis

A daily closing below the two-week-old ascending trend line, at 108.70 by the press time, keeps DXY bears hopeful of breaking the 108.00 immediate support.