US Dollar Index pares recent gains around 105.00 with eyes on US inflation, Fed

• US Dollar Index snaps two-day recovery, prints mild losses of late.
• Mixed sentiment, cautious mood ahead of US CPI, Fed meeting challenge DXY traders.
• Risk catalysts offer additional trading filters amid a light calendar in Asia.

US Dollar Index (DXY) portrays the market’s cautious mood ahead of the United States' key inflation numbers for November, namely the Consumer Price Index (CPI), up for publishing on Tuesday. That said, the greenback’s gauge versus the six major currencies rose during the last two days before printing a sluggish start to Tuesday’s trading, around 104.95 by the press time.

That said, the DXY’s inaction could be linked to the mixed prints of the early signals for the US CPI, as well as the mixed reaction to the headlines surrounding China and Russia.

On Monday, the New York Federal Reserve’s (Fed) Survey of Consumer Inflation Expectations Survey stated that the 1-year ahead inflation expectations slumped to their lowest level since 2021 and marked the biggest month-to-month decline in November on record. It’s worth observing that the last week’s downbeat prints of the United States Producer Price Index (PPI) also hinted at softer US inflation but the University of Michigan’s (UoM) Consumer Sentiment Index, as well as the US ISM Services PMI and inflation expectations from the UoM Survey, suggested firmer prints of the US CPI.

Elsewhere, Chinese Foreign Ministry spokesman Wang Wenbin conveyed dislike for the US sanctions on two of their diplomats on Monday.  “These illegal sanctions severely affected Sino-American relations,” Wang said as per Reuters. Further, Russian President Vladimir Putin’s rejection to supply oil to the countries respecting Europe-led price cap also raise the market’s fears and propel the DXY.

Amid these plays, the US 10-year Treasury bond yields rose three basis points (bps) to 3.61% but Wall Street also closed in greed and tried to challenge the DXY buyers by the end of Monday’s North American session.

Looking forward, market forecasts for the US CPI for November hint at a softer print of 7.3% YoY, versus 7.7% prior figure, while the monthly CPI is likely to ease to 0.3% compared to 0.4% previous readings. It should be noted that the CPI ex Food & Energy appears to be the key and is expected to be unchanged at 0.3% MoM, which can please the DXY buyers in case of a firmer print. Additionally, firmer inflation data can push the Federal Open Market Committee (FOMC) members to stay away from the bearish bias and defend the latest rate hikes, which in turn could signal more upside for the DXY.

Technical analysis

A one-month-old bearish channel formation, currently between 103.60 and 106.00, restricts short-term US Dollar Index moves.