US Dollar Index: Firmer yields defend DXY bulls above 103.00 ahead of US Retail Sales

• US Dollar Index stays defensive at the highest level in five weeks, reverses pullback from multi-day high of late.
• Fears of economic slowdown, China woes underpin US Treasury bond yields and DXY ahead of top-tier data.
• Downbeat US inflation expectations, concerns about Fed policy pivot in September keep US Dollar bears hopeful.
• Softer US Retail Sales can prod bulls at multi-day high but Fed Minutes will be the key catalyst to watch.

US Dollar Index (DXY) bulls take a breather at the highest level in five weeks, making rounds to 103.10-15 amid the early hours of Tuesday’s Asian session. In doing so, the Greenback’s gauge versus the six major currencies portrays the market’s cautious mood ahead of the US Retail Sales while also justifying the recently downbeat US inflation clues. However, firmer US Treasury bond yields and fears emanating from China keep the DXY on the front foot after a three-day winning streak.

The DXY rose to the highest level since July 07 earlier on Monday as China-inflicted risk aversion joined strong US Treasury bond yields. However, the softer US inflation expectations and cautious mood ahead of the US data test the US Dollar Index of late.

That said, the New York Fed’s one-year inflation expectations eased to 3.5% for July, down three points by falling to the lowest level since April 2021. New York Fed survey, however, also suggested confidence in positive labor market conditions and economic transition.

Also placating the sour sentiment could be the comments from US Treasury Secretary Janet Yellen who turned down fears to the US economy emanating from a likely slowdown in China. The policymaker cited the risks to the global economic developments from China’s slowdown, the Russia-Ukraine war and climate change-related disasters, as well as their spillover effects.

It’s worth observing that the looming debt crisis in China and its contagion impact, especially amid the fears that economic recovery in the world’s biggest industrial player fades, underpin the US Dollar’s haven demand if the easing US inflation concerns challenge the Fed hawks. Also testing the market sentiment and favoring the DXY could be Russia’s firing of warning shots at a warship in the Black Sea and readiness to equip new nuclear submarines with hypersonic missiles.

While portraying the mood, Wall Street managed to close on the positive side due to the day-end recovery. However, the 10-year Treasury bond yields rose to the highest level in nine months whereas the two-year counterpart also refreshed the monthly peak amid the market’s dumping of the Treasury bonds. It should be observed that such higher yields previously triggered recession woes and the risk-off sentiment which in turn favored the US Dollar due to its haven appeal.

Looking ahead, China’s Industrial Production and Retail Sales for July will be closely observed amid fears of losing economic momentum in the world’s second-biggest economy. Later in the day, the US Retail Sales for the said month will be more important as market players keep betting on the Fed’s policy pivot in September, which in turn may weigh on the US Dollar should the scheduled data weakens.

Technical analysis

Although a one-month-old rising support line, around 102.30 at the latest, keeps the US Dollar Index buyers hopeful, a convergence of the 200-DMA and a downward-sloping resistance line from March, close to 103.30, appears a tough nut to crack for the DXY bulls.