USD Index keeps the tight range near 104.50 ahead of data

• The index trades in an inconclusive fashion near 104.50.
• US yields extend the drop to multi-session lows on Monday.
• Factory Orders, 3-month/6-month bill auctions come next.

The lack of a clear direction prevails around the greenback and motivates the USD Index (DXY) to navigate a narrow range in the mid-104.00s on Monday.

USD Index cautious ahead of data, lower yields

The index now adds to Friday’s decline and retests the 104.30 region on the back of further retracement in US yields across the curve and a mild bias towards the risk-associated universe at the beginning of the week.

In fact, the dollar kicks in the new trading week in an offered mood. This stance remains underpinned by fresh speculation that the Fed might not raise rates as high as previously estimated, which remains in stark contrast to the ongoing “aggressive” narrative from most Fed’s rate setters.

Furthermore, and according to the FedWatch Tool measured by CME Group, the probability of a 25 bps rate hike at the March 22 meeting hovers around 75%.

Later in the US docket, Factory Orders for the month of January will take centre stage followed by 3-month/6-month Bill Auctions.

What to look for around USD

The index keeps the erratic performance well in place around the 104.50 region so far.

The probable pivot/impasse in the Fed’s normalization process narrative is expected to remain in the centre of the debate along with the hawkish message from Fed speakers, all after US inflation figures for the month of January showed consumer prices are still elevated, the labour market remains tight and the economy maintains its resilience.

The loss of traction in wage inflation – as per the latest US jobs report - however, seems to lend some support to the view that the Fed’s tightening cycle have started to impact on the still robust US labour markets somewhat.

Key events in the US this week: Factory Orders (Monday) - Powell’s Semiannual Monetary Policy Report, Wholesale Inventories, Consumer Credit Change (Tuesday) – MBA Mortgage Applications, ADP Employment Change, Balance of Trade, Powell’s Semiannual Monetary Policy Report, Fed’s Beige Book (Wednesday) – Initial Jobless Claims (Thursday) – Nonfarm Payrolls, Unemployment Rate, Monthly Budget Statement (Friday).

Eminent issues on the back boiler: Rising conviction of a soft landing of the US economy. Persistent narrative for a Fed’s tighter-for-longer stance. Terminal rates near 5.5%? Fed’s pivot. Geopolitical effervescence vs. Russia and China. US-China trade conflict.

USD Index relevant levels

Now, the index is losing 0.11% at 104.41 and the breakdown of 104.09 (weekly low March 1) would open the door to 103.45 (55-day SMA) and finally 102.58 (weekly low February 14). On the flip side, the next resistance emerges at 105.35 (monthly high February 27) seconded by 105.63 (2023 high January 6) and then 106.55 (200-day SMA).