US Dollar Index regains poise and retests 96.00 ahead of data

• DXY reverses the recent downside and re-targets 96.00 and above.
• US yields extend the leg lower amidst rising geopolitical risks.
• Initial Claims, Philly Fed Index next of note in the US docket.

The greenback regains composure and manages to leave behind part of the recent weakness when tracked by the US Dollar Index (DXY).

US Dollar Index looks to yields, geopolitics

The index posts decent gains after two daily pullbacks in a row on Thursday and ahead of the opening bell in the old continent.

The bounce in the dollar comes pari passu with rising disbelief over the de-escalation of tensions in the Russia-Ukraine front, all following confusing headlines regarding an apparent pullback of Russian troops from the Ukrainian border.

In the meantime, US yields add to the gradual weekly retracement although they manage well to keep business close to the area of recent peaks. On this, yields showed some bull steepening after the FOMC Minutes signalled the Committee’s plans to start the normalization of the monetary conditions soon and the reduction of the balance sheet later in the year. In addition, members saw inflation risks tilted to the upside and the labour market closer to full employment.

Back to the Fed’s tightening prospects, CME Group’s FedWatch Tool now sees the probability of a 25 bps rate hike on March 16 at around 65% vs. just above 40% on Wednesday.

In the US data space, Initial Claims take centre stage seconded by the Philly Fed Index, Housing Starts and Building Permits.

What to look for around USD

The resumption of the risk-off mood benefits the greenback and lent extra support to DXY. Indeed, the recent corrective downside in the buck was deemed as temporary only, as the positive stance in the dollar remains underpinned by the current elevated inflation narrative as well as the probability of a 50 bps rate hike by the Fed at the March gathering. Looking at the longer run, and while the constructive outlook for the greenback appears well in place for the time being, recent hawkish messages from the BoE and the ECB carry the potential to undermine the expected move higher in the dollar in the next months.

Key events in the US this week: Building Permits, Housing Starts, Initial Claims, Philly Fed Manufacturing Index (Thursday) – CB Leading Index, Existing Home Sales (Friday).

Eminent issues on the back boiler: Escalating geopolitical effervescence vs. Russia and China. Fed’s rate path this year. US-China trade conflict under the Biden administration. Debt ceiling issue.

US Dollar Index relevant levels

Now, the index is gaining 0.08% at 95.85 and a break above 96.43 (weekly high Feb.14) would open the door to 97.44 (2022 high Jan.28) and finally 97.80 (high Jun.30 2020). On the flip side, the next down barrier emerges at 95.67 (weekly low Feb.16) seconded by 95.17 (weekly low Feb.10) and then 95.13 (weekly low Feb.4).