US Dollar Index looks cautious around 106.50 ahead of data, Fed

• The index extends the range bound theme in the mid-106.00s.
• US yields also appear side-lined ahead of he upcoming Fed event.
• Consumer Confidence, housing data next on tap in the US docket.

The greenback, in term of the US Dollar Index (DXY), extends its consolidative mood around the 106.50 region on turnaround Tuesday.

US Dollar Index now looks to data ahead of FOMC

The index sheds ground for the fourth consecutive session so far on Tuesday, although it appears well supported by the 106.00 neighbourhood amidst prevailing cautiousness ahead of the key FOMC gathering on Wednesday.

Indeed, the Federal Reserve will start its 2-day meeting on Tuesday and is expected to announce a 75 bps interest rate hike on Wednesday. The probability of such outcome is now nearly 73% according to CME Group’s FedWatch Tool.

In the meantime, the dollar appears within a consolidative phase ahead of the release of the always relevant Consumer Confidence tracked by the Conference Board, New Home Sales and the FHFA’s House Price Index.

What to look for around USD

The index came under downside pressure following nearly 20-year highs north of the 109.00 mark in mid-July, although it seems to have met some decent support near 106.00 for the time being.

So far, the dollar remains underpinned by the Fed’s divergence vs. most of its G10 peers (especially the ECB) in combination with bouts of geopolitical effervescence and the re-emergence of the risk aversion among investors.

On the flip side, market chatter of a potential US recession could temporarily undermine the uptrend trajectory of the dollar somewhat.

Key events in the US this week: House Price Index, CB Consumer Confidence, New Home Sales (Tuesday) – MBA. Mortgage Applications, Durable Goods Orders, Advanced Goods Trade Balance, Pending Home Sales, Fed Interest Rate Decision, Powell Press Conference (Wednesday) – Flash Q2 GDP, Initial Claims (Thursday) – PCE Price Index, Personal Income, Personal Spending, Final Michigan Consumer Sentiment (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Escalating geopolitical effervescence vs. Russia and China. Fed’s more aggressive rate path this year and 2023. US-China trade conflict. Future of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is down 0.09% at 106.39 and faces initial support at 106.11 (weekly low July 22) followed by 103.67 (weekly low June 27) and finally 103.41 (weekly low June 16). On the other hand, a break above 109.29 (2022 high July 15) would expose 109.77 (monthly high September 2002) and then 110.00 (round level).