US Dollar Index eyes to regain 102.50 as yields rebound towards 3.0%, US inflation in focus

• DXY teases recovery after reversing from a fortnight's high.
• US Treasury yields rebound, stock futures retreat as growth fears join geopolitical headlines during sluggish Asian session.
• WB’s Malpass, US Treasury Secretary Yellen allowed USD bulls to take breather.
• Fed’s September rate hike depends upon Friday’s US CPI while ECB, risk catalysts are important too.

US Dollar Index (DXY) braces for further upside as it fails to extend the previous day’s pullback from a two-week high, picking up bids near 102.35 during Wednesday’s Asian session.

In doing so, the greenback’s relative price versus the six major currencies tracks the recently firmer US Treasury yields, up 1.8 basis points to 2.98%.

It’s worth noting that the S&P 500 Futures’ first negative daily performance in three, down 0.25% around 4,150 at the latest, also seems to underpin the greenback’s safe-haven demand.

The underlying reason could be the market’s consolidation of recent moves amid a lack of major data/events, as well as risk-negative news from Ukraine. “Kyiv says it has not yet reached any agreement with Russia or Turkey to allow the safe passage of its grain ships in the Black Sea, injecting skepticism into a push by the U.N. to create a vital food corridor,” said Politico.

Previously, the US Treasury yields snapped a six-day uptrend and the Wall Street benchmark rose for the second consecutive day to exert downside pressure on the DXY.

Recession fears emanating from the faster monetary policy normalization by the major central banks were cited as the key reason for the previous day’s moves. The fears grew on a comment from World Bank (WB) President David Malpass who warned that faster-than-expected tightening could push some countries into a debt crisis similar to the one seen in the 1980s.

Also exerting downside pressure on the bond coupons were comments from US Treasury Secretary Janet Yellen and hopes of faster economic recovery in China, both of which favor risk appetite. On Tuesday, US Treasury Secretary Yellen testified on the Fiscal Year 2023 Budget before the Senate Finance Committee while saying that the US economy faces challenges from "unacceptable levels of inflation", as well as headwinds from supply chain snags. The policymaker added, “An appropriate budget is needed to complement Fed’s actions to tame inflation without harming the labor market.”

On the contrary, a record monthly drop in the US trade deficit, down 19.1% to USD87.1bn for April, as well as Germany’s downbeat Factory Orders for April, put a floor under the DXY.

Looking forward, markets are likely to remain sidelined ahead of Thursday’s European Central Bank (ECB) meeting and the US Consumer Price Index (CPI) for May, which in turn highlights risk catalysts to be watched for fresh impulse.

Technical analysis

Tuesday’s pin bar candlestick below the 21-DMA level of 102.70 tests the US Dollar Index bulls. However, the 50-DMA, around 101.90, restricts the short-term downside of the greenback gauge.