US Dollar Index: DXY hangs near multi-week low as traders keenly await FOMC decision

• The USD struggles to gain any traction amid bets for an imminent Fed rate hike pause.
• The overnight sharp rise in the US bond yields lends some support and helps limit losses.
• Traders also seem reluctant as the focus remains glued to the key FOMC policy decision.

The US Dollar (USD) struggles to capitalize on the overnight modest bounce from its lowest level since May 17 and remains on the defensive through the Asian session on Wednesday. The USD Index (DXY), which tracks the Greenback against a basket of currencies, hovers around the 102.80 region, down over 0.10% for the day, as traders keenly await the outcome of the highly-anticipated FOMC monetary policy meeting.

The Federal Reserve (Fed) is scheduled to announce its decision at 18:00 GMT this Wednesday and is widely expected to skip raising interest rates. The bets were lifted by the latest US consumer inflation figures released on Tuesday, which showed that the headline CPI barely rose in May and the annual increase was the smallest since March 2021. This, in turn, is seen as a key factor that keeps the USD bulls on the defensive, though the downside seems limited heading into the key central bank event risk.

Given that the year-on-year inflation rate is still well above the 2% target, the Fed might still opt to stick to its hawkish stance. Moreover, the markets have been pricing in a greater chance of another 25 bps lift-off at the July FOMC policy meeting. This had led to the overnight sharp spike in the US Treasury bond yields, which, along with a modest downfall in the US equity futures, is holding back traders from placing aggressive bearish bets around the safe-haven Greenback and limiting any further losses.

Apart from the crucial FOMC decision, investors will closely scrutinize Fed Chair Jerome Powell's comments at the post-meeting press conference for clues about the future rate-hike path. This, in turn, will play a key role in influencing the near-term USD price dynamics and help investors to determine the next leg of a directional move. In the meantime, Wednesday's release of the US Producer Price Index (PPI) might provide some impetus to the USD later during the early North American session.

Technical levels to watch