US Dollar Index stays depressed below 108.00 as Fed hawks retreat

• US Dollar Index extends Friday’s pullback amid cautious optimism.
• Downbeat US inflation expectations, mixed Fedspeak weigh on DXY during pre-Fed blackout.
• Hopes for more stimulus from China, US recession fears also favor greenback sellers.
• Light calendar emphasizes on risk catalysts for fresh impulse.

US Dollar Index (DXY) portrays the market’s cautious optimism as it stays pressured around 107.90 during Monday’s Asian session. In doing so, the greenback’s gauge versus the six major currencies drops for the second consecutive day.

Receding fears of the 100 bps rate hike from the US Federal Reserve (Fed), as well as the pre-Fed blackout period, could be cited as the key catalysts behind the market’s latest optimism. That said, the reduction in the hawkish Fed bets could be linked to Friday’s mostly downbeat US data and mixed Fedspeak.

A softer US inflation expectations and mixed comments from the Fed policymakers appeared to have weighed on the US Dollar Index the previous day. That said, US Retail Sales for June grew 1.0% MoM versus 0.8% expected and -0.1% prior (revised from -0.3%) whereas the University of Michigan's Consumer Confidence Index edged higher to 51.5 in July's flash estimate, versus 49.9 expected and 50.0 prior. However, the Index of Consumer Expectations declined to its lowest level since May 1980 at 47.3. Further, the US Industrial Production also contracted by 0.2% MoM in June while the New York Empire State Manufacturing Index rose to 11.1 versus -2.0 expected and -1.2 prior.

Talking about the Fedspeak, Atlanta Fed President Raphael Bostic said on Friday that June's 75 basis points rate hike was a "big move" and added that the Fed wants policy transition to be orderly, as reported by Reuters. On the other hand, San Francisco Fed President Mary Daly said on Friday that the "Fed is working on getting down inflation without stalling economy." Further, St. Louis Federal Reserve Bank President James Bullard sounded neutral as he said, per Reuters, on Friday that it wouldn't make too much of a difference to do a 100 basis points (bps) or a 75 bps rate hike at the next meeting.

It’s worth noting that the fear of the US recession also exerts downside pressure on the DXY. Fears of a second negative GDP print, which technically triggers US recession fears, appeared to have gained momentum after Friday’s Atlanta Fed GDPNow release. That said, the Atlanta Fed GDPNow estimate for 2Q growth is coming in at -1.5% versus -1.2% last. The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.5 percent on July 15, down from -1.2 percent on July 8.

Elsewhere, China’s hints of more stimulus and an impending rate hike from the European Central Bank (ECB) keeps DXY sellers hopeful.

Amid these plays, Wall Street closed higher and the US Treasury yields ended the week on a negative note. However, the S&P 500 Futures remain firmer around 3,870 while the US 10-year Treasury yields drop 1.1 basis points (bps) to 2.91% at the latest.

Moving on, the pre-Fed silence and a light calendar could restrict DXY moves and may help the counter-trend traders to keep reins for a bit more days ahead of Thursday’s European Central Bank (ECB) meeting, as well as Friday’s July PMIs.

Technical analysis

A daily closing below an ascending support line from July 06, now resistance around 108.25, directs DXY bears towards the previous resistance line from May 13, close to 106.50 by the press time.