US Dollar Index retreats towards 109.00 as Fed’s Powell failed to impress bulls, inflation eyed

• US Dollar Index prints mild losses after a volatile day.
• Yields regain upside momentum after Fed’s Powell, ECB advocated for higher rates.
• Recent improvement in US data, Sino-American headlines seem to favor mood.
• Light calendar can test momentum traders ahead of next week’s US CPI.

US Dollar Index (DXY) remains on the back foot around 109.50, after a volatile day, as cautious optimism in the market joins a light calendar during Friday’s Asian session. The greenback gauge marked mild gains the previous day as the European Central Bank’s (ECB) monetary policy announcements and Fed Chair Jerome Powell’s speech offered volatility.

It should be noted that comments from US Treasury Secretary Janet Yellen, signaling likely positive change in the US-China trade ties, seemed to have helped the market sentiment and Antipodeans of late. However, the Wall Street Journal’s (WSJ) piece challenges the optimism a bit.

“US Treasury Secretary Yellen sees lower gas prices putting downward pressure on US inflation,” said Reuters. The news also mentioned that “Asked whether the Biden administration was still considering removing some tariffs on Chinese imports as a way to lower costs, Yellen said that President Joe Biden was still considering the issue.”

Also keeping the traders positive are recently firmer US data and hopes that the global central bankers will be able to overcome inflation-led blow with a holistic approach and higher rates.

That said, the US Weekly Initial Jobless Claims slumped to the lowest levels since May, with the latest figures beyond 222K.

On Thursday, Fed Chairman Jerome Powell said that they need to act forthrightly and strongly on inflation, as reported by Reuters. "We think by our policy moves we will be able to put growth below trend and get labor market back into better balance," added Fed’s Powell.

On the other hand, the European Central Bank (ECB) matched the market’s expectations by announcing a 75 basis points (bps) increase in the key rates. As a result, the interest rate on the main refinancing operations, the marginal lending facility and the deposit facility will be increased to 1.25%, 1.5% and 0.75% in that order.

Following the announcements, ECB President Christine Lagarde said, "It will take more than 2 meetings but less than 5 to get to the end of hikes." The policymaker also resisted confirming the next rate hike as 75 bps while highlighting the data dependency. It should be noted that ECB’s Lagarde mentioned that the downside scenario for growth includes negative growth in 2023.

Amid these plays, the US 10-year Treasury yields remain sidelined near 3.32%, after a positive day, whereas the S&P 500 Futures traces Wall Street’s gains.

Moving on, China’s Consumer Price Index (CPI) and Producer Price Index (PPI) for August will be important amid talks over the recession. However, major attention will be given to the next week’s US CPI as Fedspeak reaches the blackout period.

Technical analysis

A daily closing below the monthly support line, now resistance around 110.20, keeps DXY bears hopeful of revisiting a two-month-old horizontal support near 109.30.