US Dollar Index tumbles to the sub-105.00 area post CPI

• The index loses further momentum and breaches 105.00.
• US Headline CPI came below estimates in July.
• The probability of a 75 bps hike dwindled after the data.

The greenback collapsed to multi-week lows in the sub-105.00 region when measured by the US Dollar Index (DXY) on Wednesday.

US Dollar Index plummeted after CPI prints

The index depreciated rapidly after US inflation figures showed the headline CPI rose less than initially expected in July. Indeed, consumer prices rose 8.5% and 5.9% when it comes to the core reading, both prints slowing the upside traction from the previous month.

The perception that inflation pressures might be at or near their peak seems to have prompted investors to re-price the possibility of a large rate hike (75 bps) at the next FOMC event in September. This view was also reflected in the marked correction lower in US yields across the curve, which in turn added to the buck’s daily decline.

Supporting the above, CME Group’s FedWatch Tool now shows the probability of a 75 bps rate hike in September is at nearly 39% from around 70% prior to the CPI release.

Extra data in the US calendar saw MBA Mortgage Applications expand 0.2% in the week to August 5 and Wholesale Inventories expand 1.8% in June vs. the previous month.

What to look for around USD

The index suddenly came under extra pressure and trades in the 105.00 zone, as market participants continue to assess the recent publication of US inflation figures.

The dollar, in the meantime, is poised to suffer some extra volatility amidst investors’ repricing of the next move by the Federal Reserve.

Looking at the macro scenario, the dollar appears propped up by the Fed’s divergence vs. most of its G10 peers (especially the ECB) in combination with bouts of geopolitical effervescence and occasional re-emergence of risk aversion.

Key events in the US this week: MBA Mortgage Applications, Inflation Rate, Wholesale Inventories (Wednesday) Initial Claims, Producer Prices (Thursday) – Flash Consumer Sentiment (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 losing 1.13% at 105.09 and a breach of 104.94 (monthly low August 10) would expose 103.67 (weekly low June 27) and finally 103.52 (100-day SMA). On the upside, a breakout of 107.42 (weekly high post-FOMC July 27) would expose 109.29 (2022 high July 15) and then 109.77 (monthly high September 2002).