US Dollar Index braces for early signals of US inflation as yields curve inversion renew recession woes

• US Dollar Index keeps the bounce off weekly low, sidelined of late.
• Difference between 10-year and two-year US Treasury bond yields turned the widest since 1980 and triggered recession fears.
• US data, Fed talks and China-linked optimism challenge DXY bulls ahead of US Michigan Consumer Sentiment Index, inflation expectations.

US Dollar Index (DXY) picks up bids to extend the latest recovery from the weekly low, mildly bid near 103.25 during early Friday. In doing so, the greenback’s gauge versus the six major currencies cheers the fresh fears surrounding the economic slowdown ahead of the key US data. It’s worth noting that the downbeat comments from the Federal Reserve (Fed) officials and softer US data, as well as China-inspired market optimism in the Asia-Pacific zone, seem to challenge the DXY buyers.

US Dollar Index refreshed its weekly low on early Thursday as United States President Joe Biden and Treasury Secretary Janet Yellen both turned down the fears of economic slowdown in the US. Adding strength to the DXY’s fall were the statements from Richmond Federal Reserve (Fed) President Thomas Barkin, softer US Weekly Initial Jobless Claims and China story. However, an inversion of the US Treasury bond yield curve renewed recession fears and joined the cautious mood ahead of the early signals for the US inflation, up for publishing the next week, to help the US Dollar rebound.

On Thursday, Fed’s Barkin appeared too dovish while suggesting rate cuts as he said that it would make sense for the Fed to steer "more deliberately" from here due to lagged effects of policy. Previously, Fed Chair Jerome Powell hesitated in cheering the upbeat US jobs report and raised fears of no more hawkish moves from the US central bank.

Talking about the data, the US Weekly Initial Jobless Claims rose to 196K versus 190K expected and 183K prior. “The advance number for seasonally adjusted insured unemployment during the week ending January 28 was 1,688,000, an increase of 38,000 from the previous week's revised level," said the US Department of Labor (DOL) showed on Thursday.

Elsewhere, US President Biden’s taming of fears emanating from the US-China jitters, following the China balloon shooting by the US, joined the hopes of People’s Bank of China’s (PBOC) rate cuts and the restart of the China-based companies’ listing on the US exchanges to favor risk-on mood during early Thursday.

It should be noted, however, that the difference between the 10-year and 2-year Treasury bond yields turned the widest since 1980 as the former prints 3.66% and the latter came in around 4.50%. The same signaled the market’s recession fears and triggered the US Dollar run-up.

Moving on, the preliminary readings of the United States consumer-centric numbers for February like the Michigan Consumer Sentiment Index and 5-year Consumer Inflation Expectations will be crucial to watch for the DXY traders. Above all, the market’s preparations for the next week’s US Consumer Price Index (CPI) will be important to watch. Given the upbeat forecasts for the US consumer sentiment gauge, the US Dollar Index is likely to defend the latest recovery.

Technical analysis

US Dollar Index rebound remains elusive unless providing a successful break of the downward-sloping resistance line from late November 2022, close to 103.85 by the press time.