US Dollar Index struggles around 20-year high above 108.00, focus on US inflation

• US Dollar Index bulls take a breather around the highest levels since late 2002.
• Market sentiment dwindles as US data, WH Memo probed pessimism.
• IMF projections renew recession fears ahead of US CPI for June.

US Dollar Index (DXY) portrays the market’s anxiety ahead of the key US inflation data as it seesaws around the highest levels in two decades, marked the previous day. In doing so, the greenback’s gauge versus the six major currencies pares recent losses while defending the 108.00 threshold, around 108.16 during Wednesday’s Asian session.

The White House (WH) statement joined downbeat US data to trigger the DXY’s pullback from a multi-year high the previous day. “The US economic data, including the June jobs report, are not consistent with a recession in the first or second quarters,” the White House said in a memo released on Tuesday, as reported by Reuters. The news contributed to the market’s profit booking moves ahead of the key data/events.

Further, the US NFIB Business Optimism Index for June slumped to the lowest since early 2013 while flashing 89.5 figures versus 93.1 prior.

It should, however, be noted that the latest economic projections from the International Monetary Fund (IMF) appear to have renewed the market fears and underpinned the US dollar’s safe-haven demand. IMF cuts US 2022 GDP growth projection to 2.3% from 2.9% in late June, due to revised US data. “The Fund included the new forecasts in the full report of its annual assessment of the U.S. economy, which highlighted the challenges of high inflation and the steep Federal Reserve interest rate hikes needed to control prices,” said Reuters.

On the same line were covid fears from China as virus variant spreads in Shanghai and announced lockdown in Wugang city of Henan Province.

Above all, the market’s anxiety ahead of the key US CPI for June, expected to rise to 8.8% YoY from 8.6%, is likely acting as the key barrier to the DXY moves. Ahead of the inflation data, Federal Reserve Bank of Richmond President Thomas Barkin said, “A path to cool inflation but a recession is possible.”

Amid these plays, Wall Street benchmarks closed in the red, despite the intermediate recovery, while the US 10-year Treasury yields printed the second day of the downside at around 2.97%. Further, the S&P 500 Futures begin Wednesday with mild gains.

Moving on, US inflation numbers will be crucial for the DXY traders but updates from China and chatters surrounding Russia could also entertain traders. Should US CPI mark a positive surprise, DXY may witness further upside.

Also read: US June CPI Preview: Dollar rally could lose steam on soft inflation data

Technical analysis

Overbought RSI tests US Dollar Index bulls targeting September 2002 high near 109.80. However, pullback remains elusive until the quote declines below the previous resistance line from May 13, close to 106.50 at the latest.