US Dollar Index aims to recapture 109.00 as market optimism fades ahead of US inflation

• US Dollar Index picks up bids to pare intraday loss, grinds higher after the first weekly loss in four.
• Chatters surrounding China and oil price cap on Russia energy export test sentiment amid sluggish session.
• Hawkish Fedspeak, pre-CPI anxiety also challenges DXY bears as economic calendar remains light.
• US Retail Sales, Michigan Consumer Sentiment Index also appear important for fresh clues.

US Dollar Index (DXY) licks its wounds near 108.80, consolidating the first weekly loss in four amid a sluggish Asian session. In doing so, the greenback’s gauge versus the six major currencies justifies China’s off and mixed concerns surrounding the Sino-American tension and the Russia-Ukraine crisis, not to forget hawkish Fedspeak and the lack of major data/events.

News from Reuters suggesting that US President Joe Biden is to hit China with broader curbs on US chip and tool exports seemed to have probed the market’s previous risk-on mood. On the same line could be the analysis suggesting a 20-year low oil demand from China due to covid curbs, shared by Reuters.

Comments from US Treasury Secretary Janet Yellen and some of the prominent Fed policymakers could also be considered restricting the DXY’s further downside. US Treasury Secretary Janet Yellen mentioned, during the CNN interview on Sunday, “Fed is going to need skill and luck to bring inflation down while maintaining labor market strength.” The policymaker also mentioned that US consumers could experience a spike in gas prices in winter when the European Union significantly cuts back on buying Russian oil.

On the other hand, Federal Reserve Governor Christopher Waller was the prominent one as he said on Friday that he supports another significant hike in two weeks. On the same line was Kansas City Fed President Esther George who said, as reported by Reuters, “Case for continuing to remove policy accommodation is clear cut.” Furthermore, Cleveland Federal Reserve Bank President Loretta Mester said, “One inflation report is insufficient to alter one's outlook.” The policymaker also stated that he sees policy rates rising slightly above 4% by early 2023.

Previously, the recently easing early signals of inflation, in contrast with firmer macros in other areas, favored market players to gain confidence that the global central bankers will be able to tame the price pressure. In doing so, they manage to accept the hawkish comments/actions of the European Central Bank (ECB) and the US Federal Reserve (Fed) while also favoring equities and commodities.

Against this backdrop, Wall Street marked another positive day and the US Treasury yields remained sluggish for the 10-year while being firmer for the two-year tenure. The S&P 500 Futures prints mild gains at the latest.

Moving on, the US Consumer Price Index (CPI) and Retail Sales for August, as well as the preliminary readings of the Michigan Consumer Sentiment Index for September, will be crucial as markets await the Fed’s next move. Should the scheduled data print softer inflation pressure, the DXY may witness further downside.

Technical analysis

A daily closing beyond the 21-DMA hurdle, previous support around 108.75, appears necessary for the DXY bulls to retake control.