US Dollar Index rebound approaches 105.60 previous support on Fed, China chatters

• US Dollar Index pares the biggest daily loss in five month, grinds higher around intraday top of late.
• Fed policymakers hesitate in cheering downbeat US inflation.
• Biden’s rethink on China tariffs, covid woes in the Dragon Nation challenge risk-on mood.
• US PPI, Jobless Claims could entertain intraday traders.

US Dollar Index (DXY) consolidate the biggest daily loss since early March during the mid-Asian session on Thursday. In doing so, the greenback’s gauge versus six major currencies takes clues from the mixed Fedspeak and fears surrounding China to reverse the US inflation-led losses, as well as refresh the intraday high near 105.40 at the latest.

The US Consumer Price Index (CPI) declined to 8.5% on YoY in July versus 8.7% expected and 9.1% prior. After the data, Reuters mentioned that traders of futures tied to the Fed's benchmark interest rate pared bets on a third straight 75-basis-point hike at its Sept. 20-21 policy meeting, and now see a half-point increase as the more likely option.

On the same line was US President Joe Biden who said, “Seeing some signs that inflation may be moderating,” as reported by Reuters. "We could face additional headwinds in the months ahead," Biden added. "We still have work to do but we're on track," adds US President Biden.

The Wall Street benchmarks rallied after the inflation miss but the US Treasury yields couldn’t cheer the softer CPI. The reason could be linked to the comments from Minneapolis Fed President Neel Kashkari and Chicago Fed President Charles Evans. Fed’s Kashkari mentioned that he hasn't "seen anything that changes" the need to raise the Fed's policy rate to 3.9% by year-end and to 4.4% by the end of 2023. Further, Fed policymaker Evens stated, “The economy is almost surely a little more fragile, but would take something adverse to trigger a recession.” Fed’s Evans also called inflation "unacceptably" high.

Furthermore, headlines surrounding China also underpinned the latest rebound in the US dollar. Reuters relied on sources to mention that the saying US President Biden rethinks steps on China tariffs in wake of Taiwan response. Additionally, a jump in the coronavirus cases from China, to 700 new confirmed cases in the mainland on August 10 versus 444 a day earlier, also weighs on the pair.

Against this backdrop, US 10-year Treasury yields rebound to 2.79% whereas the S&P 500 Futures print mild gains around 4,130 by the press time.

Moving on, DXY traders should pay attention to the weekly readings of the US Jobless Claims and the monthly Producer Price Index (PPI) for July for fresh impulse. Also important will be the risk catalysts and Friday’s preliminary readings of the Michigan Consumer Sentiment Index for August.

Technical analysis

US Dollar Index holds onto the previous day’s downside break of the ascending trend line from late March, as well as the 50-DMA, despite the latest corrective pullback from a six-week low.

Even if the DXY crosses the 50-DMA and the previous support line, respectively around 105.55 and 105.65, the bulls need validation from the 21-DMA hurdle surrounding 106.45 to retake control.

On the contrary, bears could aim for the 38.2% Fibonacci retracement level of the DXY’s run-up from late March to mid-July, around 104.85.

It’s worth noting that the bearish MACD and steady RSI (14) join the latest breakdown of the key supports, now resistances, to keep sellers hopeful.

US Dollar Index: Daily chart

Trend: Further weakness expected