US Dollar Index: Hawkish Fed concerns keep DXY bulls hopeful

• US Dollar Index pares the biggest weekly gain since September 2022 at seven-week high.
• Strong inflation-linked data underpin hawkish Fed bias to propel DXY run-up.
• Geopolitical fears add strength to the US Dollar’s haven demand.
• US PMIs, Durable Goods Orders eyed for fresh impulse, Fed talks are the key.

US Dollar Index (DXY) clings to mild losses around 105.15 as it consolidates recent gains at the highest levels since early January during Monday’s Asian session. That said, the greenback’s gauge versus six major currencies printed the biggest weekly gain since September 2022 in the last, as well as posted the four-week uptrend, before retreating from the 2023 peak marked in early January.

The DXY bulls cheered hawkish Fed bets, as well as the geopolitical fears surrounding China and Russia, while refreshing the multi-day high. However, a lack of major data/events triggered the quote’s latest pullback.

As per the latest read of the FEDWATCH tool, market players price a year-end effective fed funds rate at 5.3%, versus 5.1% signaled by the US central bank in its December meeting. The hawkish Fed concerns could be linked to the strong US data, mainly suggesting strong inflation pressure, as well as the upbeat comments from the US Federal Reserve (Fed) officials.

Among the US data, Friday’s US Personal Consumption Expenditures (PCE) gained major attention as the headline PCE Price Index rose to 5.4% YoY versus 5.3% prior and 4.9% market forecasts. Further, the more relevant Core PCE Price Index, known as Fed’s favorite inflation gauge, rose to 4.7% YoY, compared 4.6% prior and analysts' forecast of 4.3%.

On the other hand, Cleveland Fed President Loretta Mester told CNBC on Friday that his funds' rate was above the median in December and still thinks they need to be somewhat above 5%. The policymaker also added that inflation risks still tilted to the upside. Following the suit was Federal Reserve Bank of Boston President Susan Collins who said, “More rate hikes needed to deal with 'too high' inflation.”  Furthermore, Governor Philip Jefferson said, “Wage growth in the US is running too high to be consistent with a timely and sustainable return to the Federal Reserve's 2% inflation objective.”

Elsewhere, German and European Union leaders criticized China’s 12-point peace plan and raised the market’s geopolitical fears, which in turn weighed on the market sentiment and propel the US Dollar.

While portraying the mood, Wall Street benchmarks posted the biggest weekly fall in 2023 while the US two-year Treasury bond yields rose to the highest levels since early November 2022.

Looking ahead, this week’s US ISM Manufacturing PMI, Services PMI, Durable Goods Orders and China’s official PMIs will be crucial for the market, as well as for the DXY traders. However, an absence of the US jobs report and a light calendar for the Fed watchers may allow the DXY to pare some of its latest gains.

Technical analysis

The US Dollar Index pullback remains elusive unless providing a daily close below the 200-day Exponential Moving Average (EMA) level surrounding 104.85.