US Dollar Index pulls back from weekly high, Fed rate hike bets should limit deeper losses

• The US Dollar struggles to capitalize on the overnight US CPI-inspired gains to the weekly high.
• The uncertainty over the Fed’s rate-hike path is seen as a key factor capping gains for the buck.
• The fundamental backdrop still supports prospects for the emergence of some USD dip-buying.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, edges lower during the Asian session on Friday and erodes a part of the previous day's US CPI-inspired strong gains to the weekly high. The downside, however, seems cushioned in the wake of reviving bets for further policy tightening by the Federal Reserve (Fed).

The US Bureau of Labor Statistics (BLS) reported on Thursday that the headline US CPI rose 0.4% in September and the yearly rate held steady at 3.7% as compared to expectations for a downtick to 3.6%. Meanwhile, the Core CPI, which excludes volatile food and energy prices, matched estimates and eased to the 4.1% YoY rate in September, hitting a 24-month low. The inflation, meanwhile, remains above the Fed's target and keeps the door open for at least one more Fed rate hike in 2023.

Furthermore, Boston Fed President Susan Collins said that the latest inflation data underscores uneven progress toward restoring price stability. Collins reiterated her view that the central bank may have to raise rates again to combat inflation. This, in turn, suggests that the US central bank will have to keep rates higher for longer. This led to the overnight sharp rise in the US bond yields and should continue to act as a tailwind for the US Dollar (USD), warranting some caution for bearish traders.

The recent dovish comments from other Fed officials, meanwhile, raise the uncertainty over the future rate-hike path and put a lid on the US bond yields, which is undermining the buck. Nevertheless, the fundamental backdrop seems tilted in favour of the USD bulls and suggests that the downtick might be seen as a buying opportunity. Traders now look to Philadelphia Fed President Patrick Harker's speech and the Preliminary Michigan Consumer Sentiment Index for a fresh impetus.

Technical levels to watch