US Dollar Index defends the biggest daily gains in two weeks above 107.00, Fed eyed

• US Dollar Index grinds higher after rising the most in 12-days the previous day.
• Risk-aversion wave joins hawkish expectations from the Fed to underpin USD dollar demand.
• Equities, yield curve also contribute to the DXY’s strength amid mixed data, Eurozone recession fears.
• US Durable Goods Orders also become important to watch, Fed is the key.

US Dollar Index (DXY) seesaws around 107.25 during Wednesday’s Asian session, after posting the biggest daily jump in a fortnight the previous day. The greenback’s run-up could be linked to the escalated risk-off mood, as well as cautious sentiment ahead of the Federal Open Market Committee (FOMC) meeting. It’s worth noting that the recently mixed US data also contributes to the DXY strength of late.

Fears of recession intensified after the International Monetary Fund (IMF) cut its global growth forecast (once again) this year, to 2.9% from 3.6% forecast in April. The Washington-based organization also raised concerns over more economic hardships amid a full cut-off of Russian gas to Europe and a 30% drop in Russian oil exports, both of which are looming.

It should be noted that the disappointing results from the global retailer Walmart also contributed to the recession fears. Furthermore, the widening difference between the 2-year and the 10-year bond coupons, recently to the most since the year 2000, also portrayed the traders’ rush to the risk-aversion.

Talking about the data, the US CB Consumer Confidence fell for a third consecutive month in July, to 95.7 from 98.4 prior. Further, the US New Home Sales dropped to 0.59M for June versus 0.66M expected and 0.642M previous readout. On the same line, Richmond Fed Manufacturing Index rose to the highest level since April, to 0 from -13 expected and -9 prior (revised up from -11).

Amid these plays, Wall Street closed in the red but the S&P 500 Futures prints mild gains amid the pre-Fed consolidation, not to forget recent hopes of Sino-American peace as US President Joe Biden prepares to talk to China amid deteriorating relations.

That said, the US Dollar Index is likely to witness the pre-Fed inaction while the US Durable Goods Orders for June, -a 0.4% forecast compared to 0.8% prior, could try to entertain traders. It’s worth observing that the US central bank is expected to announce 75 basis points (bps) of a rate hike but some of the traders also highlight the case for the 100 bps move, making the event more interesting amid recession fears.

Also read: Fed Preview: Powell to reignite dollar rally with promise to crush inflation, whatever the cost

Technical analysis

A two-month-old ascending trend line defends DXY bulls unless the quote drops below 106.30. The recovery moves, however, need validation from 107.50. Given the quote's successful trading beyond the short-term key support line, as well as firmer RSI and bullish MACD, the US Dollar is expected to stretch the latest run-up.