US Dollar Index struggles to defend 102.00 amid cautious optimism, focus on US inflation

• DXY fades Friday’s rebound as headlines from China favor sentiment amid sluggish session.
• China eyes faster unlock, the US braces for a part of Trump-era tariffs’ removal.
• Upbeat US NFP, hawkish Fedspeak renewed bets over Fed’s aggression.
• Friday’s US CPI for May appears important as pre-Fed blackout for policymakers starts.

US Dollar Index (DXY) fails to extend Friday’s recovery as firmer sentiment and pre-data anxiety weigh on the greenback gauge of late. That said, the DXY drops 0.10% to 102.06 during an inactive Asian session on Monday.

Upbeat mood, mildly positive to be precise, seems to take clues from China-linked headlines. Beijing’s readiness to ease the virus-led activity controls joins the US preparations for announcing tariff relief for China are the key catalysts.

“Dine-in service in Beijing will resume on Monday, except for the Fengtai district and some parts of the Changping district, the Beijing Daily said. Restaurants and bars have been restricted to takeaway since early May,” reports Reuters.

Additionally, US Commerce Secretary Gina Raimondo said, per Reuters, “President Joe Biden has asked his team to look at the option of lifting some tariffs on China that were put into place by former President Donald Trump, to combat the current high inflation.”

It’s worth noting, however, that Friday’s strong US Nonfarm Payrolls (NFP) join the recently hawkish Fedspeak to propel the odds of a third 50 bps rate hike in September to 75% from 35% appeared last week.

That said, US Nonfarm Payrolls (NFP) came in 390K for May, more than 325K expected but lesser than the upwardly revised 428K previous readouts. Further, the Unemployment Rate remained unchanged at 3.6% versus expectations of a slight decline to 3.5%. Additionally, the US ISM Services PMI fell to 55.9 in May, versus 56.4 market consensus and 57.1 flashed in April. Following the data, Cleveland Fed President Loretta Mester crossed wires while saying that the one problem that the Fed has is inflation. The policymakers also added that the risks of a recession have gone up.

Against this backdrop, Wall Street benchmarks closed in the red and the US 10-year Treasury yields posted the first weekly gain in three whereas the S&P 500 Futures remain mildly bid at around 4,100 but yields fail to extend the gains near 2.95% by the press time.

Looking forward, an absence of the Fed policymakers’ speeches, due to the pre-Fed blackout norm, highlights this week’s US Consumer Price Index (CPI) for May for fresh impulse. Should the inflation data fail to recede, unlike the Fed’s preferred version of inflation namely the Core PCE Price Index, the US dollar may have further upside to track.

Technical analysis

Unless crossing a monthly horizontal resistance line near 102.55, the US Dollar Index eyes to retest the 21-DMA surrounding 101.70.