US Dollar Index grinds higher past 103.50 as US inflation looms amid mixed Fed concerns

• US Dollar Index stays defensive after two-week uptrend.
• Fed’s Barkin sounds dovish despite pushing back rate cut talks.
• US-China tension weigh on sentiment and favor DXY bulls amid dicey markets.
• US CPI for January appears important after recently firmer US jobs data, inflation cues.

US Dollar Index (DXY) remains sidelined bear 103.60 as the greenback buyers await the US inflation data during early Monday, following a two-week uptrend.

In doing so, the US Dollar’s gauge versus the six major currencies portrays the market’s cautious mood amid firmer US data, mixed comments from the Federal Reserve (Fed) officials and geopolitical fears surrounding “unidentified objects” which raised US-China tension.

On Friday, preliminary readings of the US University of Michigan (UoM) Consumer Sentiment for February rose to 66.4 versus 65.0 expected and 64.9 prior. Further, the UoM noted that the year-ahead inflation expectations rebounded to 4.2% this month, from 3.9% in January and 4.4% in December.  “Long-run inflation expectations (5-year) remained at 2.9% for the third straight month and stayed within the narrow 2.9-3.1% range for 18 of the last 19 months,” Stated UoM. Further, the US Bureau of Labor Statistics announced on Friday that it revised the monthly Consumer Price Index (CPI) for December to +0.1% from -0.1%, based on updated seasonal adjustment factors.

Considering the data, Philadelphia Federal Reserve President Patrick Harker pushed back the chatters of a Fed rate cut during 2023. However, the policymaker did mention, “Fed not likely to cut this year but may be able to in 2024 if inflation starts ebbing.”  Comments from Fed’s Harker were in line with Fed Chairman Jerome Powell and Richmond Federal Reserve (Fed) President Thomas Barkin who previously refrained from cheering upbeat US jobs report. On the other hand, the majority of the Fed Governors and the US diplomats, including US President Joe Biden and Treasury Secretary Janet Yellen, ruled out US recession concerns and appear hawkish for the Fed. Hence, there prevails a dilemma among the Fed policymakers which in turn makes this week’s US inflation data all the more important.

Not only the mixed Fed and anxiety ahead of the US inflation but the US and China’s shootings of unidentified objects, with the White House alleging China over spying, also seems to weigh on the market sentiment and favor the DXY bulls. During the weekend, the Pentagon shot down a mystery object by saying that it appeared to have traveled near US military sites and posed not just a threat to civilian aviation but also as a potential tool for surveillance. “It was the fourth unidentified flying object to be shot down over North America by a US missile in a little more than a week,” said Reuters.

Amid these plays, S&P 500 Futures print mild losses and the US Treasury bond yields remain sidelined.

Moving on, risk catalysts may entertain DXY traders ahead of Tuesday’s key CPI data for January. Should the scheduled inflation numbers manage to remain firmer, the odds of the Fed’s policy pivot get thinner and allow the US Dollar to remain firmer, which in turn could weigh on prices of commodities and the Antipodeans.

Technical analysis

A daily closing beyond the 50-DMA, around 103.40 by the press time, hints at the DXY’s ability to cross the descending resistance line from late May, close to 103.75 at the latest.