US Dollar Index eyes three-week uptrend as Fed hawks ride on higher inflation expectations

• US Dollar Index reverses early-week pullback from monthly high.
• Fed officials, US Treasury Secretary Yellen highlight strong inflation to defend current policies.
• Receding fears of US-China tension, retreat in yields and light calendar challenge DXY traders.
• Multiple EU statistics, weekly US Jobless Claims may entertain traders.

US Dollar Index (DXY) holds onto the previous day’s recovery moves around 103.50 as bulls brace for the third consecutive weekly gain in a row amid hawkish comments from the US policymakers. It’s worth noting, however, that the lack of major data/events joins mixed concerns surrounding the latest geopolitical tension between the US and China to probe the greenback’s gauge versus the six major currencies.

Talking about the Federal Reserve (Fed) officials, Fed Governor Christopher Waller teased a long fight with a 2.0% inflation target by citing expectations of tighter monetary policy for longer than expected. New York Federal Reserve President John Williams was almost on the same line while saying that the labor market is still very strong and noted that they have more work to do on rates, adding data will determine the path of rate hikes.

Further, Fed Governor Lisa Cook said that the central bank remains focused on restoring price stability, as inflation is still running too high. She added that they would need a restrictive monetary policy for some time.

It should be noted that US Treasury Secretary Janet Yellen also mentioned, “While inflation remained elevated, there were encouraging signs that supply-demand mismatches were easing in many sectors of the economy.”

However, the former Fed Chair Yellen also mentioned that it was important to improve communications with Chinese counterparts on economic issues, which in turn eased the US-China tension which escalated on the weekend news of the US shooting a Chinese balloon and terming it a spy. Further, US President Joe Biden also tried placating the Sino-American tussle as he said, “We intend to compete completely with China but we are not seeking conflict, as that has been the case so far.”

Not only easing fears of China but a retreat in the US Treasury bond yields also challenges the US Dollar Index bulls. That said, the US 10-year Treasury bond yields reversed from a one-month high to snap a three-day uptrend on Wednesday, pressured around 3.62% at the latest. The same helped S&P 500 Futures to ignore Wall Street’s downbeat closing and remain mostly unchanged as of late.

Looking forward, multiple statistics from Europe relating to inflation and growth may entertain DXY traders on Thursday as the European Central Bank (ECB) officials are also hawkish but lack support from the data and can weigh on the US Dollar Index in case of strong economics. The same also highlights the US Weekly Initial Jobless Claims.

Technical analysis

A daily closing beyond the 50-DMA hurdle of 103.50 becomes necessary for the US Dollar Index bull’s conviction.