US Dollar Index: Bears keep reins at two-week low around 108.00, US inflation in focus

• US Dollar Index fades bounce off fortnight low, down for the third consecutive day.
• Downbeat US inflation expectations, market’s risk-on mood weigh on the greenback.
• Absence of Fedspeak, light calendar adds strength to the DXY’s downside.
• US CPI is likely to ease in August but the size is a concern.

US Dollar Index (DXY) prints a three-day downtrend as it retreats towards 108.00 during Tuesday’s Asian session, fading the bounce off the two-week low marked the previous day. In doing so, the greenback’s gauge versus the six major currencies seems to prepare for the all-important US Consumer Price Index (CPI) data for August.

Ahead of the data, a fall in the US consumer inflation expectations and risk-positive news from Ukraine, as well as a light calendar, seem to favor the DXY bears. On the same line could be the absence of China and the 15-day Fed blackout ahead of the September Federal Open Market Committee (FOMC) meeting.

The US Consumers saw inflation at 5.75% over the next 12 months in August, down from July’s 6.2%, as well as the lowest since October 2021, as per the New York Fed's monthly consumer expectations survey details released on Monday.  Further data shared by Reuters suggest that the three-year inflation expectations marked the slowest pace since late 2020 while averaging 2.8% versus 3.2% reported in July.

Furthermore, updates that Ukraine is gaining success in pushing back the Russian military from some of its areas seem to have underpinned the market’s cautious optimism, even as the same raised the fears of Russia’s harsh retaliation. On the same line could be the hopes of more stimulus from major economies like China, the US, the UK and Europe. Furthermore, the latest news from the Wall Street Journal (WSJ) suggesting that the US gas prices are down for the 13^th consecutive week also eased the market’s pressure and favored the risk-on mood, as well as the gold price.

It should be noted that the hawkish tone of the European Central Bank (ECB) policymakers could also be considered negative for the DXY, especially amid an absence of Fedspeak. While a slew of ECB policymakers has favored higher rates during the weekend, Vice President Luis de Guindos was the latest to convey his optimism while saying, “Any GDP contraction will be less than in the euro crisis.” The policymaker also mentioned, “I don't know how much rates will climb.”

Amid these plays, the risk-on mood weighed on the US Dollar Index, as portrayed by the firmer Wall Street close, which in turn ignored the upbeat US Treasury yields. It should be noted that the US Treasury yields pare recent gains and the S&P 500 Futures print mild gains by the press time.

Looking forward, US CPI for August becomes crucial after the latest softness in the price pressure. The forecasts suggest the headline number ease to -0.1% MoM versus 0.0% prior while the CPI ex Food & Energy is likely to remain unchanged at 0.3% MoM. If the inflation numbers arrive softer, the US dollar may have a further downside to track.

Also read: US CPI Preview: Dollar set to climb on low core expectations, three scenarios

Technical analysis

The first daily closing below the 21-DMA, around 108.90 at the latest, in a month directs US Dollar Index bears towards the late July swing high near 107.40.