US Dollar Index pokes six-month low around mid-101.00s on dovish Fed concerns ahead of US GDP

• US Dollar Index holds lower ground near the six-month bottom marked the last week.
• Divergence between Fed and ECB policymakers’ latest comments, as well as data from Europe and US, weigh on DXY.
• Treasury bond yields, Wall Street remain mixed ahead of the key catalysts.

US Dollar Index (DXY) remains on the back foot as sellers attack the multi-month low marked the last week around 101.30, close to 101.55 by the press time of early Thursday. In doing so, the greenback’s gauge versus the six major currencies braces for the third consecutive weekly fall while renewing the intraday low.

It’s worth noting that hopes of a dovish Federal Open Market Committee (FOMC) grew stronger amid the Fed blackout and weigh on the DXY. The reason could be linked to the previously downbeat US data surrounding wages for December and activities for January. “Traders broadly expect the Fed to increase rates by 25 basis points (bps) next Wednesday, a step down from a 50 bps increase in December,” said Reuters.

Additionally weighing the US Dollar could be the hawkish comments from the European Central Bank (ECB), as well as the upbeat data from the bloc. On Wednesday, Germany’s IFO Business Climate Index matched 90.2 forecasts for January versus 88.6 prior but the Current Assessment eased from 94.4 to 94.1, versus 95.0 expected. Further, the IFO Expectations for the said month also came in higher-than-consensus 85.0 while rising to 86.4, compared to 83.2 previous readings.

That said, ECB Governing Council member Gabriel Makhlouf became the last policymaker from the bloc’s central bank to fire the hawkish shot, suggesting a 50 bps rate hike, ahead of the one-week blackout pre-ECB. "We need to continue to increase rates at our meeting next week – by taking a similar step to our December decisions," said ECB’s Makhlouf. Makhlouf further added that they need to increase rates again at the March meeting.

Elsewhere, cautious optimism in the market adds strength to the bearish bias for the US Dollar Index as traders expect a China-inspired economic rebound to push back the recession fears.

Against this backdrop, as well as taking clues from the mixed earnings report, Wall Street closed mixed and the US Treasury bond yields remained sidelined near 3.45. The S&P 500 Futures also remain sluggish around 4,036 by the press time.

While the DXY bears are in control, their further dominance depends upon the first readings of the US fourth quarter (Q4) Gross Domestic Product (GDP), expected to print annualized growth of 2.6% versus 3.2% prior. Also important to watch will be the US Durable Goods Orders for December and the Q4 Personal Consumption Expenditure (PCE) data. Should the scheduled data print upbeat outcomes, the US Dollar Index traders may get a reason to pare latest losses.

Also read: US Gross Domestic Product Preview: Three reasons to expect a US Dollar-boosting outcome

Technical analysis

Although December 2022 low near 101.45 restricts short-term US Dollar Index rebound, the DXY’s further downside remains elusive unless the quote breaks a six-week-old descending support line, currently around 101.10.