US Dollar Index pares US GDP inspired gains ahead of Fed’s favorite inflation gauge

• US Dollar Index reverses the previous day’s corrective bounce off eight-month low.
• US GDP came in firmer-than-expected but the details appeared fishy and probed DXY bulls afterward.
• Cautious mood ahead of US Core PCE Price Index for December, FOMC keeps US Dollar traders on the dicey floor.

US Dollar Index (DXY) retreats to 101.80, following a corrective bounce off a multi-day low, as the greenback traders await the key US data during early Friday. In doing so, the US Dollar’s gauge versus the six major currencies fail to defend the previous day’s gains inspired mainly by the US fourth quarter (Q4) Gross Domestic Product (GDP).

That said, the US Q4 GDP marked an annualized growth rate of 2.9% versus 2.6% expected and 3.2% prior. On the same line, the Durable Goods Orders jumped 5.6% in December versus 2.5% market forecast and -1.7% upwardly revised prior. It should be noted, however, that the growth of Personal Consumption Expenditures Prices weakened to 3.2% QoQ in Q4 compared to 4.3% marked forecast and prior readings. Further, Core Personal Consumption Expenditures eased to 3.9% QoQ for Q4 from 4.7% previous readings, versus 5.3% expected.

Although the US GDP and Durable Goods Orders do portray a rosy picture of the world’s largest economy, the underlying details surrounding price pressure seem to challenge the hawkish Fed concerns and pushed back the DXY bulls afterward.

As a result, the US 10-year Treasury yields not only snapped a two-day downtrend but also posted the biggest daily gains in a week while rising to 3.50%. It’s worth noting that the key US equity benchmarks on Wall Street also managed to rise despite mixed earnings reports and firmer yields.

It should be noted that the US House Republicans’ consideration to extend the debt limit to September 30 favored the risk-on mood and also exert downside pressure on the DXY.

Moving on, the Fed’s preferred inflation gauge, namely Core Personal Consumption Expenditures (PCE) - Price Index for December, expected to remain unchanged at 0.2% MoM, will be crucial for the DXY traders amid mixed signals from the previous day’s data. Also increasing importance of the scheduled statistics is the next week’s Federal Open Market Committee (FOMC) meeting. In a case where the inflation number surprises the market, mainly by declining, the US Dollar will have hard time to recover.

Technical analysis

An inverted hammer candlestick on the daily US Dollar Index chart joins nearly overbought RSI (14) to tease buyers. However, a clear break of 102.10 appears necessary for the DXY bull’s conviction.