US Dollar Index: DXY licks US inflation-inflicted wounds at three-week low above 103.00 on Fed day

• US Dollar Index grinds near the lowest levels in three weeks after snapping two-day winning streak.
• US inflation data bolsters market’s bets on Fed’s status quo and weigh on the DXY despite upbeat yields.
• Cautious mood ahead of the FOMC announcements put a floor under the US Dollar price.
• Expectations of witnessing a hawkish halt from US central bank highlight qualitative updates from the Fed.

US Dollar Index (DXY) steadies above 103.00, after bouncing off a three-week low, as markets brace for the Federal Reserve (Fed) announcements on Wednesday. The greenback’s gauge versus six major currencies slumped the most in a week, to the lowest levels since May 22, after the US inflation data fuelled speculations of the US central bank’s halt to the rate hike trajectory present in the last 10 monetary policy meetings.

As per the latest US inflation data for May, the headline Consumer Price Index (CPI) drops more-than-expected and prior releases to 0.1% MoM and 4.0% YoY. However, the Core CPI, known as the CPI ex Food & Energy, matches 0.4% monthly and 5.3% yearly forecasts. It’s worth noting that the US headline CPI dropped to the lowest since March 2021 and hence justifies the market’s expectations of the US Federal Reserve (Fed) hawkish halt, which in turn should have weighed on the US Dollar.

Following the data, the CME’s FedWatch Tool suggests more than a 90% chance of the US Federal Reserve’s (Fed) no rate hike during today’s monetary policy meeting, versus around 75% chance before that.

It’s worth noting, however, that the ex-Fed Officials have been pushing for a hawkish halt to the rate hikes and prods the DXY bears. On Tuesday, Former Dallas Federal Reserve Bank (Fed) President Robert Kaplan said that he would support a "hawkish pause" at this week's meeting while also adding that he would “leave the question of a July hike open.” Previously, Ex-Boston Fed President Eric Rosengren tweeted, “Expect a hawkish skip this week.”

As a result, Wall Street benchmarks rose for the second consecutive day but the US Treasury bond yields remain firmer. That said, the US 10-year Treasury bond yields rose to a 13-day high of 3.83% whereas the two-year counterpart poked the highest levels in three months with 4.70% mark before easing to 4.67% in the last hours.

Looking ahead, the pre-Fed sentiment may prod the DXY, as well as allow the greenback’s gauge to pare recent losses. However, the traders will pay attention to the US central bank’s economic forecasts, dot-plot and Chairman Jerome Powell’s press conference for clear directions afterward, as the rate hike pause is almost given.

Technical analysis

A clear bounce off the 100-DMA, around 103.00 by the press time, keeps the US Dollar Index buyers hopeful. The recovery moves, however, need validation from the 21-DMA hurdle of 103.75 to convince the DXY bulls.