US Dollar Index looks offered around 94.30 ahead of US CPI, FOMC

• DXY loses upside traction following recent 2021 highs.
• US 10-year yields extends the breakdown of 1.60%.
• US inflation figures, FOMC Minutes take centre stage in the NA session.

Following Tuesday’s new 2021 highs past 94.50, the US Dollar Index (DXY) now runs out of steam and recedes to the 94.30 in the European morning.

US Dollar Index looks to CPI, FOMC

The index now appears offered and gives away part of Tuesday’s advance to new YTD highs in the 94.55/60 band.

The corrective move in the buck tracks the retracement in US yields. Indeed, the front end of the curve slips back to 0.34% (from 0.36%), while the belly of the curve hovers around the 1.57% (from the vicinity of 1.64%). The closely watched 2y-10y yield gap has now shrunk to 123 pts.

In the meantime, all the attention is expected to gyrate around the release of the US inflation figures for the month of September, all against the backdrop of the ongoing supply constraint and the unabated energy crisis.

Other than the CPI figures, the FOMC will publish its Minutes of the latest meeting, while MBA Mortgage Applications and the speech by FOMC’s Governor L.Brainard (permanent voter, dovish) are also due later in the session.

What to look for around USD

The index clinched new 2021 high at 94.56 on Tuesday despite the move lower in US yields. Positive news from the debt-ceiling and inflation jitters sponsored the selloff in the bonds market seen in past sessions and propelled yields to fresh tops, lending extra legs to the buck at the same time. Looking beyond the immediate term, the dollar remains underpinned by markets’ adjustment to prospects for a “soon” start of the tapering process, probable rate hikes at some point during next year and the rising view that elevated inflation could last more than initially expected.

Key events in the US this week: Inflation tracked by the CPI, FOMC Minutes (Wednesday) – initial Claims (Thursday) – Retail Sales, flash Consumer Sentiment (Friday).

Eminent issues on the back boiler: Biden’s multi-billion Build Back Better plan. US-China trade conflict under the Biden’s administration. Tapering speculation vs. economic recovery. Debt ceiling debate. Geopolitical risks stemming from Afghanistan.

US Dollar Index relevant levels

Now, the index is losing 0.23% at 94.29 and a break above 94.56 (2021 high Oct.12) would open the door to 94.74 (monthly high Sep.25 2020) and then 94.76 (200-week SMA). On the flip side, the next down barrier emerges at 93.77 (20-day SMA) followed by 93.67 (monthly low Oct.4) and finally 92.98 (weekly low Sep.23).