US Dollar Index: DXY remains confined in weekly range as traders keenly await US CPI

• The US Dollar gains some positive traction on Wednesday, albeit lacks any follow-through.
• Hawkish Fed expectations and a softer risk tone continue to act as a tailwind for the buck.
• Traders seem reluctant to place aggressive bets ahead of the US consumer inflation figures.

The US Dollar (USD) attracts some dip-buying following the previous day's good two-way price swings and holds steady above mid-104.00s through the Asian session on Wednesday. The USD Index (DXY), which tracks the Greenback against a basket of currencies, however, remains confined in the weekly trading band as traders keenly await the US consumer inflation figures before placing fresh directional bets.

The crucial US CPI report is due for release later during the early North American session and will provide fresh cues about the Federal Reserve's (Fed) future rate hike path after the widely anticipated pause in September. The markets have been pricing in the possibility of one more 25 bps lift-off by the end of this year. The expectations were lifted by the upbeat US macro data released last week, which pointed to a resilient economy and should allow the Fed to keep rates higher for longer.

Hence, any signs of sticky inflation will reaffirm bets for further policy tightening by the Fed and set the stage for the resumption of the USD's recent uptrend, which had pushed the index to a six-month peak last week. Heading into the key US data risk, hawkish Fed expectations remain supportive of elevated US Treasury bond yields and might continue to act as a tailwind for the buck. Apart from this, a softer tone around the equity markets could further lend support to the safe-haven Greenback.

Market participants remain concerned about the worsening conditions in China - the world's second-largest economy. Adding to this, a Reuters poll showed that business confidence in Japan's largest firms declined in early September amid a slowdown in China – one of Japan’s biggest export markets. This, along with worries about headwinds stemming from rapidly rising borrowing costs, tempers investors' appetite for riskier assets and continues to drive some haven flows towards the buck.

Technical levels to watch