US Dollar Index stays firm around 20-year high on strong yields, focus on inflation

• DXY remains on the front foot near a two-decade high.
• Firmer jobs report highlights this week’s inflation as the key push for Fed hawks.
• Headlines from China, G7 also weigh on risk profit and underpin the USD buying.

US Dollar Index (DXY) stays on the bull’s radar by taking rounds to the highest levels since 2002, surrounding 104.10, flashed the last week. In doing so, the greenback gauge cheers the increasing odds of the Fed’s faster, as well as heavier rate hikes, while also benefiting from the risk-off mood.

Although Fed’s Powel rejected the idea of 75 basis points (bps) of a rate hike, fears of inflation weighing on the economic growth and Friday’s upbeat US jobs report for April suggest that the hawks aren’t off the table. As a result, this week’s US Consumer Price Index (CPI) data for April will be crucial to watch for clear direction.

Elsewhere, G7 nations met during the weekend and announced further sanctions on Russian oil, as well as services. “After meeting virtually with Ukrainian President Volodymyr Zelensky, the leaders said they would cut off key services on which Russia depends, reinforcing the isolation of Russia "across all sectors of its economy,” said Reuters. Also portraying the risk-off mood was news from China as Shanghai announced fresh activity restriction measures due to the worsening covid conditions.

The US Nonfarm Payrolls (NFP) reprinted the 428K figures, if compared to the revised figures for March, by surpassing the 391K forecasts. On the same line, the Unemployment Rate also remained intact at 3.6%.

Also read: Strong US payrolls deliver a reprieve to Fed policy

Following the data, Minneapolis Fed President and FOMC member Neel Kashkari said in a blog post on Medium, “Given that long-term real rates have the greatest influence on the demand for credit, financial conditions are already nearly back to neutral levels.”  The policymaker also said his assessment of the nominal neutral rate of interest is still that it is around 2.0%. It’s worth noting that the President of the Federal Reserve Bank of St. Louis James Bullard reiterated his bullish bias and pushed the Fed towards a 3.5% rate.

It’s worth noting that the US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, struggle to remain firmer after refreshing the record top in the last week. The same challenges the USD bulls ahead of the key inflation data, up for publishing on Wednesday.

That said, the US 10-year Treasury yields rise to the fresh high since November 2018, up two basis points near 3.14%, whereas the S&P 5600 Futures drop 1.0% by the press time.

Technical analysis

Considering the overbought RSI, November 2002 low near 104.15 appears an immediate hurdle for the DXY bulls. The pullback moves, however, remain elusive unless dropping back below the post-Fed swing low surrounding 102.30.