US Dollar Index comes under pressure near 98.70 ahead of FOMC

• DXY adds to recent gains below the 99.00 yardstick.
• The Fed is expected to hike rates by 25 bps later on Wednesday.
• Retail Sales, Mortgage Applications, NAHB Index also on the docket.

The greenback extends its bearish note and retests the 98.70 region when tracked by the US Dollar Index (DXY) on Wednesday.

US Dollar Index focuses on the Fed, geopolitics

The index loses ground for the third consecutive session so far midweek amidst the better tone in the risk complex, particularly after Russia’s Lavrov suggested there is certain hope in the peace talks with Ukraine.

Other than the geopolitical scenario, investors are expected to closely follow the FOMC event later in the NA session, where the Committee is expected to raise the Fed Funds Target Range by 25 bps, while the future rate path and the balance sheet runoff will surely take centre stage as well.

In the US cash markets, yields in the short end of the curve alternate gains with losses in the upper end of the recent range, while yields in the belly and the long end extend the upside for yet another session to the 2.15% region and the 2.50% zone, respectively.

Other than the FOMC gathering, it will be an interesting session in terms of the US docket, with the releases of Retail Sales, Business Inventories, the NAHB Index and weekly MBA Mortgage Applications.

What to look for around USD

The index sees some correction from recent peaks in response to the mild optimism surrounding the Russia-Ukraine peace dialogue along with the persistence of sentiment towards the risk-associated space. However, the buck's leg lower has been deemed as temporary amidst the current uncertainty around the war in Ukraine, while bouts of risk aversion should prop up inflows into the safe havens and lend legs to the dollar at the same time. Also supportive of the stronger buck appears the current elevated inflation narrative, the start of the Fed’s normalization of its monetary conditions later this week and the solid performance of the US economy.

Key events in the US this week: Retail Sales, Business Inventories, NAHB Index, FOMC Meeting, Powell press conference (Wednesday) – Building Permits, Housing Starts, Philly Fed Index, Initial Claims, Industrial Production (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. Futures of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is losing 0.32% at 98.70 but a break above 99.29 (high Mar 14) would open the door to 99.41 (2022 high Mar 7) and finally 99.97 (high May 25 2020). On the flip side, the next down barrier emerges at 97.71 (weekly low Mar 10) followed by 97.44 (monthly high Jan 28) and then 96.51 (55-day SMA).