US Dollar Index struggles to cheer hawkish Fedspeak amid slowdown fears

• US Dollar Index remains pressured after declining the most in a week.
• Mostly dull US data renews recession fears, hawkish Fed talks fail to lift the DXY.
• Light calendar, pre-FOMC blackout highlights risk catalysts as the key for fresh impulse.

US Dollar Index (DXY) holds lower ground near 102.00, bracing for the second weekly loss on early Friday amid fears of the US recession. In doing so, the greenback’s gauge versus the six major currencies ignores hawkish comments from the Federal Reserve (Fed) officials.

That said, the US Unemployment Claims dropped to the lowest levels since late April 2022, to 190K for the week ended on January 13 versus 214K expected and 205K prior. Further, the Philadelphia Fed Manufacturing Survey Index improved to -8.9 for January compared to -11.0 market forecasts and -13.7 previous readings. However, US Building Permits eased in December to 1.33M MoM versus 1.37M consensus and 1.351M prior while the Housing Starts also dropped to 1.382M during the stated month from 1.401M in November, versus 1.359M expected. It’s worth noting that the downbeat US Retail Sales and Producer Price Index (PPI) raised fears of an economic slowdown in the world’s largest economy after the softer wage growth and activity data flashed earlier.

It should be noted that Federal Reserve Bank of New York President John Williams said on Thursday that the US central bank has more rate hikes ahead and sees signs inflationary pressures might be starting to cool off from torrid levels. Additionally, Federal Reserve Vice Chair Lael Brainard said that it will take time and resolve to get high inflation down to the fed's 2% target. The policymaker also added, “The policy will need to be sufficiently restrictive for some time.” On the same line, Boston Fed President Collins signaled that the baseline remains that the effective fed funds rate should settle slightly above 5.0%, implying three more 25bp rate rises.

Amid these plays, Wall Street closed with losses for the second consecutive day and the US 10-year Treasury yields also improved. However, receding fears of the Fed’s hawkish move and softer data weigh on the DXY of late.

Moving on, a light calendar emphasizes today’s Fedspeak as the key catalyst due to the pre-Fed blackout starting this Saturday. Should the policymakers keep their hawkish bias, the DXY may lick its wounds. However, the US Dollar rebound needs a solid base to reverse the losses made during 2023.

Technical analysis

Although a four-month-old descending support line puts a floor under the DXY around 101.70, recovery remains elusive unless the quote crosses the previous monthly low surrounding 103.60. That said, oversold RSI conditions hint at limited downside room.