US Dollar Index pares US inflation-led gains near 110.00 amid hawkish Fed bets

• US Dollar Index grinds higher after rising the most in 30 months.
• US CPI for August bolstered hawkish Fed bets.
• Yield curve inversion widened after US inflation data, signaled recession, stocks marked the biggest daily loss in two years.
• US PPI, other consumer-centric data may entertain traders ahead of next week’s FOMC.

US Dollar Index (DXY) bulls take a breather at the weekly top, retreating to 109.80 during Wednesday’s Asian session, amid a lack of major data/events. That said, the greenback’s gauge versus the six major currencies rallied the most since March 2020 after the US inflation data propelled hawkish Fed bets and fears of the economic slowdown.

That said, US Consumer Price Index (CPI) for August rose past 8.1% market forecasts to 8.3% YoY, versus 8.8% prior regains. The monthly figures, however, increased to 0.1%, more than -0.1% expected and 0.0% in previous readings. The core CPI, which means CPI ex Food & Energy, also crossed 6.1% consensus and 5.9% prior to print 6.3% for the said month.

Following the data, hawkish Fed bets increased, with the 75 basis points (bps) of a hike appearing almost certainly next week. It’s worth noting that there is around 25% chance that the US Federal Reserve (Fed) will announce a full 1.0% increase in the benchmark Fed rate on September 21 meeting.

Further, the yield inversion also widened after US inflation data and propelled the recession woes, which in turn drowned the XAU/USD prices due to the pair’s risk-barometer status. That said, the US 10-year Treasury yields rallied to 3.412% and those for 2-year bonds increased to 3.76% following the data, around 3.41% and 3.745% respectively at the latest. Furthermore, the US stocks had their biggest daily slump in almost two years after the US CPI release and that also pleased the metal bears.

Also contributing to the DXY strength are US President Joe Biden’s chip plans to increase hardships for China, as well as the rush toward stronger ties with China to fuel the Sino-American woes. Additionally, expectations that Russia will hit hard after retreating from some parts of Ukraine also weighed on the market sentiment and fuelled the US Dollar Index.

It should be noted that US President Joe Biden recently mentioned, “I'm not concerned about the inflation report released today.” The US leader also added that the stock market does not always accurately represent the state of the economy. The reason could be linked to the biggest slump in the US equities in two years after the US inflation data release.

Moving on, Thursday’s August month US Retail Sales and Friday’s preliminary reading of the Michigan Consumer Sentiment Index for September may entertain DXY traders ahead of the next week’s Federal Open Market Committee (FOMC). Given the firmer odds of the 0.75% rate hike and the hawkish Fed bias, the DXY is likely to remain on the bull’s radar.

Technical analysis

DXY’s U-turn from the 50-DMA, around 107.60 by the press time, keeps buyers hopeful of witnessing a fresh 20-year high, currently around 110.78.