USD Index looks to regain upside traction near 105.60 ahead of Powell

• The index comes under some pressure near 105.90.
• The ADP report surpassed expectations in February.
• Powell will testify once again before Congress later in the session.

The greenback now gives away part of the initial impulse to the vicinity of the 106.00 mark and revisits the mid-105.00s when measured by the USD Index (DXY) on Wednesday.

USD Index now targets the 106.00 barrier and above

Following the earlier move to the proximity of 106.00, the dollar now faces some selling pressure as investors wait for the second semiannual testimony by Chair Powell before Congress.

The knee-jerk in the buck also comes in tandem with the now corrective drop in US yields across the curve, soon after the short end reached fresh multi-year highs past the 5% yardstick.

The recent move higher in the dollar and US yields has been propped up by the shift in investors’ sentiment towards a 50 bps rate hike by the Fed at the March event. On this,  CME Group’s FedWatch Tool sees the probability of such scenario at around 75%, from nearly 9% a month ago.

In the US, MBA Mortgage Applications rose 7.4% in the week to March 3 and the ADP report showed the US private sector added 242K jobs during last month, more than initially estimated. Additionally, the Balance of Trade showed a $68.3b deficit in January. Later in the session, the JOLTs Job Openings comes next ahead of the second semiannual testimony by Chief Powell, this time before the House Financial Services Committee.

What to look for around USD

The index accelerates the upside momentum and navigate in multi-month highs following the hawkish testimony by Fed’s Powell on Tuesday.

The probable pivot/impasse in the Fed’s normalization process narrative is expected to remain in the centre of the debate along with the hawkish message from Fed speakers, all after US inflation figures for the month of January showed consumer prices are still elevated, the labour market remains tight and the economy maintains its resilience.

The loss of traction in wage inflation – as per the latest US jobs report - however, seems to lend some support to the view that the Fed’s tightening cycle have started to impact on the still robust US labour markets somewhat.

Key events in the US this week: MBA Mortgage Applications, ADP Employment Change, Balance of Trade, Powell’s Semiannual Monetary Policy Report, Fed’s Beige Book (Wednesday) – Initial Jobless Claims (Thursday) – Nonfarm Payrolls, Unemployment Rate, Monthly Budget Statement (Friday).

Eminent issues on the back boiler: Rising conviction of a soft landing of the US economy. Persistent narrative for a Fed’s tighter-for-longer stance. Terminal rates near 5.5%? Fed’s pivot. Geopolitical effervescence vs. Russia and China. US-China trade conflict.

USD Index relevant levels

Now, the index is losing 0.09% at 105.52 and the breakdown of 104.09 (weekly low March 1) would open the door to 103.50 (55-day SMA) and finally 102.58 (weekly low February 14). On the flip side, the next up-barrier emerges at 105.88 (2023 high March 8) seconded by 106.59 (200-day SMA) and then 107.19 (weekly high November 30 2022).