US Dollar Index extends the pullback below 108.00

• The index loses further momentum and breaches 108.00.
• Extra improvement in the risk complex keeps weighing on the dollar.
• This week’s focus will largely by on US inflation figures.

Sellers remain well in control of the sentiment around the greenback and sponsor the ongoing sell-off to the sub-108.00 area when tracked by the US Dollar Index (DXY).

US Dollar Index focuses on inflation, Fed

The index loses ground for the second session in a row and extends further the corrective downside after last week’s 20-year peaks well north of the 110.00 mark.

The move lower in the dollar comes in tandem with a small downtick in US yields across the curve, as market participants appear to have already priced in a 75 bps interest rate hike at the Fed’s September 21 gathering.

On the latter, CME Group’s FedWatch Tool now sees the probability of such a rate raise at 90% from around 57% a week ago and 45% vs. a month ago.

No data releases in the US data space other than 3-month/6-month Bill Auctions and 3-year/10-year Note Auctions.

What to look for around USD

The index has embarked on a corrective path that has already broken below the key support at 108.00 at the beginning of last week.

Bolstering the dollar’s underlying positive stance appears the firmer conviction of the Federal Reserve to keep hiking rates until inflation looks well under control regardless of a likely slowdown in the economic activity and some loss of momentum in the labour market. This view was reinforced by Chair Powell’s speech at the Jackson Hole Symposium.

Looking at the more macro scenario, the greenback appears propped up by the Fed’s divergence vs. most of its G10 peers in combination with bouts of geopolitical effervescence and occasional re-emergence of risk aversion.

Key events in the US this week: Inflation Rate (Tuesday) – MBA Mortgage Applications, Producer Prices (Wednesday) – Retail Sales, Initial Claims, Philly Fed Manufacturing Index, Industrial Production, Business Inventories (Thursday) – Flash Michigan Consumer Sentiment, TIC Flows (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Prospects for further rate hikes by the Federal Reserve vs. speculation over a recession in the next months. Geopolitical effervescence vs. Russia and China. US-China persistent trade conflict.

US Dollar Index relevant levels

Now, the index is retreating 0.92% at 107.97 and faces the next support at 107.58 (weekly low August 26) seconded by 107.24 (55-day SMA) and then 104.63 (monthly low August 10). On the other hand, a break above 110.78 (2022 high September 7) would aim for 111.90 (weekly high September 6 2002) and then 113.35 (weekly high May 24 2002).