US Dollar Index consolidates recent gains around 20-year high ahead of US data

• DXY retreats from multi-day high as traders pare the biggest daily gains in a week amid a quiet Asian session.
• Corrective pullback in US Treasury yields, stock futures could be linked to the greenback’s latest move.
• US PPI matches forecasts but Fed’s Powell reiterates 50 bps rate hike expectations.
• US Michigan Consumer Sentiment for May will be the last key data to watch this week.

US Dollar Index (DXY) bulls take a breather around a 20-year high, recently easing to 104.75 as sluggish markets trigger consolidation of recently sharp movements, mostly in favor of the greenback, during Friday’s Asian session.

The greenback gauge rose during the last three consecutive days to rise to refresh a multi-year high around 105.00. The underlying forces could be linked to the market’s fears of inflation and growth, coupled with the concerns surrounding the Fed’s faster/heavier rate hikes and covid/geopolitical fears.

That being said, the latest pullback in the DXY takes clues from the US Treasury yields’ bounce off a two-week low, as well as mildly bid stock futures. The US 10-year Treasury yields also portray a corrective pullback after refreshing a two-week low the previous day, around 2.86% by the press time, whereas the S&P 500 Futures print mild gains while licking its wound near one-year low.

It should be noted that the US Producer Price Index (PPI) matched 0.5% MoM forecasts and kept inflation fears on the table the previous day. However, Fed Chairman Jerome Powell reiterated the expectation that the Fed will raise interest rates by half a percentage point at each of its next two policy meetings. The same could have triggered the rebound in yields as markets anticipate 75 basis points (bps) of a rate hike. On the same line were comments from San Francisco Fed President Mary Daly who mentioned, “Is it 50, is it 25, is it 75? Those are things that I’ll deliberate with my colleagues, but my own starting point is we don’t want to go so quickly or so abruptly that we surprise Americans”.

Looking forward, DXY bulls will look for more clues to confirm the Fed’s 75 bps rate hike, which in turn highlights today’s preliminary readings of US Michigan Consumer Sentiment data for May, expected 64 versus 65.2 prior. Also important for the US Dollar Index are the risk catalysts like covid fears from China and geopolitical headlines concerning Russia and Ukraine.

Technical analysis

Despite the latest pullback, lows marked during November 2002 and the last month’s high, respectively near 104.10 and 103.95, put a floor under the DXY’s short-term downside. On the contrary, bulls are well-set to challenge the December 2002 high of 107.31.