US Dollar Index climbs above 111.00, downside still favored on Fed’s less-hawkish guidance

• The DXY is hovering above 111.00 after a gap-up start but may lose strength amid the soaring market mood.
• Fed Evans has advocated for smaller rate hikes ahead as front-loading by US central bank has done.
• The US CPI will be a key trigger ahead this week.

The US dollar index (DXY) has initiated the week on a gap-up note after bloodshed on Friday. The DXY is hovering marginally above 111.00, at the time of writing. However, bears could join the DXY’s counter and the mighty DXY may carry forward its Friday’s downside journey.

A sense of sheer optimism in the overall market amid less-hawkish guidance from the Federal Reserve (Fed) has trimmed DXY’s appeal. Also, lower chances for 75 basis points (bps) rate hike by the Fed mere at 38.5%, as per the CME FedWatch tool, have weakened DXY’s demand. While the 10-year US Treasury yields are solid above 4.16% despite the aforementioned headwinds.

Fed Evans advocated for smaller rate hikes ahead

Chicago Fed President Charles L. Evans cited on Friday that the time is ripe for smaller rate hikes by the Fed to avoid tightening monetary policy more than needed and slow the pace further once risks become more "two-sided”, as reported by Reuters.

He further added that front-loading by the Fed is almost done. The deviation between current borrowing rates at 3.75-4.00% and the desired terminal rate is one big rate hike now, therefore less room for more rate hikes could compel Fed chair Jerome Powell to adopt the ‘baby steps’ approach ahead.

US CPI- A key trigger ahead

This week, the show-stopper event will be the US Consumer Price Index (CPI) data, which will release on Thursday. As per the preliminary estimates, the headline CPI is seen lower at 8.0% vs. the prior release of 8.2%. While the core CPI that excludes oil and food prices is seen lower at 6.5% against 6.6% recorded earlier.

It is worth noting that the core inflation rate has not displayed signs of serious exhaustion yet, therefore, no meaningful change in core CPI numbers could trigger volatility in the markets.