US Dollar Index retreats towards 103.00 as Fed hawks seek assurance from US inflation

• US Dollar Index remains pressured after reversing from one-week high.
• Pullback in yields, market’s preparations for the key US CPI for January weigh on DXY.
• Hawkish Fed talks fail to put a floor under the price.
• Softer US inflation can renew Fed policy pivot talks and weigh on the US Dollar.

US Dollar Index (DXY) holds lower ground near 103.30 during early Tuesday morning in Asia, following a U-turn from the one-week high amid cautious optimism. In addition to the market’s mildly positive sentiment, the greenback’s gauge also declines as the DXY traders brace for the Consumer Price Index (CPI) for January amid mixed clues.

That said, the risk profile was mostly upbeat on Monday, after a downbeat start, as fears surrounding the unidentified flying objects near the United States and China, one of which was recently confirmed as like a metal ball, eased afterward on comments from the US General. That said, the US military authority turned down the fears while rejecting calls to believe that those flying objects were from China. Adding strength to the risk-on mood were upbeat US equities and a pullback in the US Treasury bond yields after multiple days of run-up.

It should be noted that sluggish US inflation expectations seemed to have weighed on the DXY as the 10-year and 5-year breakeven inflation rates from the St. Louis Federal Reserve (FRED) grind near monthly high, close 2.31% and 2.44% at the latest.

Even so, hawkish comments from the Fed policymakers and a lack of major positive headlines weigh on the Gold price. On Monday, Fed Governor Michelle Bowman said that the Federal Reserve will need to continue to raise interest rates in order to get them to a level high enough to bring inflation back down to the central bank's target rate, per Reuters. Before him, 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.”  His comments were mostly in line with Fed Chair Jerome Powell’s cautious optimism and exerted downside pressure on the US Dollar.

Against this backdrop, Wall Street closed on the positive side while the US Treasury bond yields retreat after multiple days of run-up.

Moving ahead, the US CPI data for January appears the key as the recent Federal Reserve (Fed) comments appear light when suggesting more rate hikes. Also, the Fed policy pivot talks aren’t far from the table and hence any disappointment from the US inflation numbers won’t hesitate to drown the DXY.

Also read: US Consumer Price Index Preview: US Dollar vulnerable to violent crash, every 0.1% in Core CPI matters

Technical analysis

50-day Exponential Moving Average (EMA) guards the immediate US Dollar Index upside near 103.75.