US Dollar Index: Bears step in and revisit 108.50

• The index comes down after hitting cycle peaks on Thursday.
• US yields resume the downside across the curve.
• Retail Sales, Industrial Production, Consumer Sentiment next on tap.

The greenback, when measured by the US Dollar Index (DXY), appears offered in the 108.50 region at the end of the week.

US Dollar Index looks to data, Fed

After hitting nearly 20-year peaks north of the 109.00 mark on Thursday, the index comes under some selling pressure and hovers around the 108.50 zone on Friday.

The pullback from almost 2-decade highs in the dollar comes as Fed’s rate-setters dialled down the probability of a full point interest rate hike at the July 27 gathering. Indeed, Fed’s Waller and Bullard – both hawks – favoured on Thursday a 75 bps raise at the upcoming meeting, adding that markets appear to have overreacted to higher-than-expected inflation figures in June.

On this, and according to FedWatch Tool by CME Group, the probability of a 100 bps hike now retreated to around 46% from over 80% on Thursday. A 75 bps hike now looks favoured by almost 54%.

Interesting session in the US calendar on Friday, as Retail Sales are due in the first turn seconded by Industrial Production, Business Inventories and the advanced prints of the Consumer Sentiment for the current month.

What to look for around USD

The index pushed higher and clinched new cycle highs past 109.00 on Thursday. It is worth noting, however, that the recent sharp move in the dollar comes largely in response to the accelerated decline in the euro and persistent uncertainty around a potential recession in the old continent.

Further support for the dollar is expected to come from the Fed’s divergence vs. most of its G10 peers (especially the ECB) in combination with bouts of geopolitical effervescence and the re-emergence of the risk aversion among investors. On the flip side, market chatter of a potential US recession could temporarily undermine the uptrend trajectory of the dollar somewhat.

Key events in the US this week: Retail Sales, Industrial Production, Flash Consumer Sentiment, Business Inventories (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Escalating geopolitical effervescence vs. Russia and China. Fed’s more aggressive rate path this year and 2023. US-China trade conflict. Future of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is down 0.12% at 108.50 and faces next contention at 107.47 (July 13) followed by 103.67 (weekly low June 27) and finally 103.41 (weekly low June 16). On the other hand, a break above 109.29 (2022 high July 15) would expose 109.77 (monthly high September 2002) and then 110.00 (round level).