US Dollar Index bulls step back below 103.00 amid ‘neutral’ Fed talks, looming inflation woes

• US Dollar Index fades bounce off one-week low, sidelined of late.
• Fed Chair Powell signal one more rate hike in 2023, Vice Chair Barr highlights data dependency.
• US inflation expectations remain firmer ahead of Fed’s favorite inflation gauge.
• Dicey markets, quarter-end positioning also restrict DXY moves ahead of Thursday’s second-tier data.

US Dollar Index (DXY) struggles to keep the previous day’s bounce off weekly low around 102.65 amid mixed signals from the Federal Reserve (Fed) officials despite inflation woes, as well as due to the recently receding banking fears.

Corrective bounce in the US Treasury bond yields joined the quarter-end positioning and cautious optimism in the market to underpin the US Dollar’s latest rebound. Adding strength to the greenback’s rebound could be the geopolitical fears emanating from China, Russia and North Korea. However, an absence of hawkish comments from the Federal Reserve (Fed) officials joins the absence of talks about banking woes to weigh on the US Dollar.

The US blacklisting of Chinese companies and Beijing’s dislike of a meeting between the White House Speak and the Taiwan President can be considered the key catalysts to challenge the previously firmer sentiment and allowed the US Dollar to snap a two-day downtrend.  Though, optimism on the technology and banking front challenged the risk-off mood, as well as the DXY’s rebound.

It’s worth noting that the US inflation expectations, per the 10-year and 5-year breakeven inflation rates from the St. Louis Federal Reserve (FRED), jumped to a two-week high the previous day and allowed the US Dollar to remain firmer.

However, Bloomberg came out with the news suggesting Fed Chair Jerome Powell showed forecasts for one more rate hike in 2023, which in turn pushed back talks of policy pivot and favor the US Dollar bulls. Though, Vice Chair for Supervision Michael Barr said, “We will be looking at incoming data, financial conditions to make a meeting-by-meeting judgment on rates.

Against this backdrop, Wall Street closed with notable gains led by tech and bank stocks while the US Treasury bond yields eased.

Looking ahead, the final readings of the US fourth quarter (Q4) Gross Domestic Product (GDP) will join the Q4 Core Personal Consumption Expenditure (PCE) details and the weekly jobless claims to direct intraday moves. However, Friday’s US Core PCE Price Index, the Fed’s favorite inflation gauge becomes crucial for the market to watch for clear directions.

Technical analysis

US Dollar Index bulls need to provide a daily closing beyond a three-week-old descending resistance line, around 102.90 by the press time, to retake control.