US Dollar Index aims to recapture 20-year high above 110.00 with focus on Fed’s Powell

• US Dollar Index pares the biggest daily loss in a month while reversing the pullback from a two-decade high.
• Pullback in yields, US data joined Fed’s Beige book to underpin consolidation ahead of the key events.
• Hawkish Fed bets, rebound in bond coupons keep buyers hopeful.
• Powell needs to defend the rate hikes to keep DXY directed towards the north.

US Dollar Index (DXY) picks up bids to pare the biggest daily loss in a month around 109.75 during Thursday’s Asian session. The greenback gauge’s latest gains could be linked to the firmer yields and hawkish Fed bets. That said, the cautious mood ahead of the monetary policy meeting by the European Central Bank (ECB) and Fed Chair Jerome Powell’s speech tests the buyers.

US 10-year Treasury yields reverse the previous day’s losses by around 3.27%, after reversing from the highest levels since mid-June. It should be noted that the CME’s FedWatch Tool signals 77% chance of the Fed’s 75 basis points (bps) rate hike in September, versus 73% marked the previous day.

Hawkish hopes from the European Central Bank (ECB) and a narrowing trade deficit appeared to have weighed on the US dollar before a few hours. On the same line could be the Fed’s Beige Book which signaled a recovery in the supply chain and slowing price growth in nine of the 12 districts. That said, US Goods and Services Trade Balance improved to $-70.7B in July from $-80.9B prior, versus $-70.3B forecasts. Further, the Good Trade Balance deteriorated to $-91.1B from $-89.1B marked in July.

While portraying the mood, Wall Street closed positive and the yields retreated whereas the S&P 500 Futures print mild losses by the press time.

Moving on, the art of Fed Chair Powell’s defense of the aggressive rate hikes will be at test during today’s speech, especially due to the hawkish hopes from the ECB. Hence, the DXY's further upside will hinge on how well Powell manages to convince markets of further rate hikes. Ahead of that, the ECB’s ability to please the policy hawks will be important to watch as well. It should be noted, however, that the ECB's anticipated 0.75% rate hike may not be able to tame the DXY for long amid recession fears and energy crisis concerning the old continent.

Technical analysis

Despite the previous pullback, the DXY remained beyond a two-month-old ascending support line, at 109.20 by the press time, which in turn favors the bulls to aim for the fresh multi-year high above 110.00.