US Dollar Index defends bounce off fortnight low around 107.00 with eyes on ECB

• US Dollar Index seesaws after bouncing off two-week low.
• Return of recession fears, higher inflation numbers join Fed’s blackout period to underpin USD rebound.
• Lack of major data/events at home tests DXY buyers.
• ECB is likely to announce 25 bps rate hike but may not disappoint US dollar bulls unless taking big step.

US Dollar Index (DXY) dribbles around 107.05 after bouncing off a fortnight low the previous day. In doing so, the greenback gauge portrays the market’s indecision ahead of a key monetary policy meeting of the European Central Bank (ECB). It’s worth noting that the DXY printed the first daily gains in four the previous day.

The DXY’s gains could be linked to the market’s fears of recession emanating from Europe and strong inflation data from the UK, as well as from Canada. Also underpinning the US dollar’s safe-haven demand were the Sino-American tensions and China’s covid woes.

Russian President Vladimir Putin mentioned that they are yet to see in which condition the equipment for Nord Stream 1 will be after returning from maintenance, per Reuters. However, European Commission President Ursula von der Leyen said on Wednesday that it was a likely scenario that there could be a full cut-off of Russian gas, as reported by Reuters. It should be noted that the fears over gas might have pushed the International Monetary Fund (IMF) to cut its growth forecasts for Germany. That said, the IMF lowered its growth forecasts for Germany to 1.2% for 2002 and 0.8% for 2023. In its previous forecast, the IMF was expecting the German economy to grow by 2% in both years. In addition to the IMF, the Asian Development Bank (ADB) also cut its developing Asia growth forecast to 4.6% for 2022 versus 5.2% previous expectations.

Also signaling more pain for the bloc, as well as for markets, were political jitters in Italy. That said, Prime Minister Mario Draghi won a confidence motion, but as three major cotillion parties boycotted the vote and hence Mr. Draghi may again resign and trigger early elections in the nation.

While portraying the mood, Wall Street closed with reduced gains and the US 10-year Treasury yields also snapped a two-day uptrend at around 3.03%. With this in mind, the S&P 500 Futures also drop 0.25% intraday to 3,952 by the press time.

Moving on, US Weekly Jobless Claims and Philadelphia Fed Manufacturing Survey for July may entertain DXY traders. However, major attention will be given to the ECB’s verdict as markets expect more than the 0.25% hike signaled the previous day. Hence, the ECB policymakers not only need to announce the 25 bps rate lift but should also do more to regain Euro bulls’ confidence, in absence of which the US dollar could extend the latest recovery.

Technical analysis

Previous resistance from May 13 joins 20-DMA to restrict short-term US Dollar Index downside around 106.45. The recovery moves, however, need validation from 107.50.