USD Index bounces off lows and regains 104.00 ahead of FOMC

• The index meets some initial contention near 103.80.
• The key ISM Manufacturing surprised to the downside in December.
• Investors’ attention remains on the FOMC Minutes due later on Wednesday.

Following an earlier drop to daily lows near 103.80, the USD Index (DXY) manages to pick up some pace and retake the 104.00 neighbourhood on Wednesday.

USD Index looks offered ahead of FOMC Minutes

Despite the bounce off daily lows, the dollar remains well on the defensive midweek against the backdrop of the broad-based better tone in the risk-associated complex.

The downbeat mood in the buck is also underpinned by another negative session of US yields across the curve, leaving the pessimism in the first week of the new trading year unchanged so far.

Furthermore, the dollar remains cautious ahead of the publication of the FOMC Minutes of the December 14 gathering later in the NA session, where market participants will closely follow members’ opinions of the recent loss of momentum in the domestic inflation vs. the resilience in the labour market and the impact on the future decisions on interest rate hikes.

In the US calendar, MBA Mortgage Applications contracted 10.3% in the week to December 30 and the key ISM Manufacturing receded to 48.4 for the month of December. Additionally, JOLTs Job Openings eased to 10.458M during November.

What to look for around USD

The dollar loses some traction after a strong start of the new year on Tuesday, when it climbed to the proximity of the 105.00 hurdle, or 2-week highs.

Meanwhile, the Fed’s pivot narrative remains in the freezer for the time being, although upcoming key results in US fundamentals would likely play a key role in determining the chances of a slower pace of the Fed’s normalization process in the next months.

Key events in the US this week: MBA Mortgage Applications, ISM Manufacturing PMI, FOMC Minutes (Wednesday) – ADP Employment Change, Initial Jobless Claims, Balance of Trade, Final S&P Global Services PMI (Thursday) – Nonfarm Payrolls, Unemployment Rate, ISM Non-Manufacturing PMI, Factory Orders (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Prospects for further rate hikes by the Federal Reserve vs. speculation of a recession in the next months. Fed’s pivot. Geopolitical effervescence vs. Russia and China. US-China trade conflict.

USD Index relevant levels

Now, the index is retreating 0.65% at 104.01 and the breakdown of 103.39 (monthly low December 30) would open the door to 101.29 (monthly low May 30) and finally 100.00 (psychological level). On the upside, the next hurdle comes at 104.85 (weekly high January 3) seconded by 105.82 (weekly high December 7) and then 106.25 (200-day SMA).