US Dollar Index gives aways earlier gains and revisits 105.00

• The index resumes the downside and flirts with 105.00.
• A 50 bps rate hike in September remains favoured so far.
• Producer Prices, Initial Claims next on tap in the NA session.

The US Dollar Index (DXY), which measures the greenback vs. a basket of its main competitors, leaves behind the initial upbeat note and refocuses on the downside near 105.00.

US Dollar Index weighed down by risk-on trade

The index extends the leg lower for the fourth consecutive session, as investors continue to favour the risk complex on Thursday, particularly following the decline in the US consumer prices during last month.

By the same token, market participants now see a 50 bps rate hike at the Fed’s September gathering as more likely, with CME Group’s FedWatch Tool noting a probability of nearly 60% of such scenario.

Amidst rising appetite for the risk complex, the greenback remains well on the defensive and challenges once again the 105.00 neighbourhood, opening the door at the same time to a potential test of recent lows near 104.60 (August 10).

In the US docket, Producer Prices for the month of July will take centre stage seconded by the usual weekly Initial Claims.

What to look for around USD

The index remains under pressure and returns to 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: 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 0.20% at 104.98 and a breach of 104.63 (monthly low August 10) would expose 103.67 (weekly low June 27) and finally 103.58 (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).