USD Index retreats from 20-year highs near 114.50

• The index meets decent hurdle near the 114.50 zone.
• US 2-year yields climb to new multi-year peaks near 4.35%.
• Fedspeak, Chicago Fed Index next on tap later in the NA docket.

The greenback, in terms of the USD Index (DXY), meets some decent resistance in the 114.50 region, an area last seen in mid-May 2002.

USD Index stronger on Fed, yields

The index adds to Friday’s uptick and surpasses the 114.00 barrier as investors continue to gauge the prospects for the continuation of the tight stance from the Federal Reserve in the next months.

The move higher in the dollar comes in tandem with further upside in yields in the short-end of the curve – a barometer of Fed’s next steps when it comes to rate hikes - which approach the 4.35% area for the first time since August 2007.

Later in the NA session, the Chicago Fed National Activity Index will be the sole release along with speeches by Boston Fed S.Collins (centrist, voter), Atlanta Fed R.Bostic (2024 voter, centrist) and Cleveland Fed L.Mester (voter, hawk).

What to look for around USD

The upside bias in the dollar remains everything but exhausted and it has been fuelled further by the recent FOMC event and comments by Chair Powell. Despite current overbought levels, there seems to be scope for extra gains in the greenback in the short-term horizon.

Propping up 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.

Looking at the more macro scenario, the greenback also appears bolstered 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: Chicago Fed National Activity Index (Monday) – Durable Goods Orders, House Price Index, New Home Sales (Tuesday) – MBA Mortgage Applications Advanced Trade Balance (Wednesday) – Final Q2 GDP Grow Rate, Initial Claims (Thursday) – PCE/Core PCE, Personal Income/Spending. Final Michigan Consumer Sentiment (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.

USD Index relevant levels

Now, the index is advancing 0.22% at 113.25 and a breakout of 114.52 (2022 high September 26) would expose 115.00 (round level) and then 115.32 (May 2002 high). On the downside, the next contention aligns at 108.11 (55-day SMA) seconded by 107.68 (monthly low September 13) and finally 107.58 (weekly low August 26).