US Dollar Index eyes the first weekly loss in three near 112.00, US PCE Inflation in focus

• US Dollar Index grinds lower around the weekly bottom.
• US inflation expectations slumped to 18-month low, Q2 GDP confirmed 0.6% contraction.
• Hawkish Fedspeak, recession woes and geopolitical concerns challenge DXY bears.
• Firmer prints of Fed’s preferred inflation gauge could renew upside momentum.

US Dollar Index (DXY) remains on the back foot around 111.90 while bracing for the first weekly loss in three during Friday’s Asian session.

In doing so, the greenback’s gauge versus the six major currencies fails to justify the recently hawkish Fedspeak and the broad recession fears amid downbeat inflation expectations. This makes today’s Core Personal Consumption Expenditure (PCE) Price Index for August, expected 4.7% YoY versus 4.6% prior, important for the greenback traders.

On Thursday, the final readings of the US Q2 Gross Domestic Product (GDP) confirmed the initial forecasts of -0.6%. It should be noted that the US Weekly Initial Jobless Claims, which dropped to 193K for the period ended on September 24, versus the 209K previous (revised from 213K) and the market expectation of 215K, also might have weighed on the DXY. The US Jobless Claims slumped to the lowest levels since April.

Following the data, St. Louis Federal Reserve Bank President James Bullard praised the slump in the weekly Initial Jobless Claims and mentioned, "We will push inflation to 2% in a reasonable compact time frame." Elsewhere, Federal Reserve Bank of Cleveland President Loretta Mester said on Thursday that they are not yet at a point where they could start thinking about stopping interest rate hikes, as reported by Reuters. Additionally,  San Francisco Fed President Mary Daly said that she expects to raise rates further in coming meetings, and early next year.

Elsewhere, recession woes amplified as the other key central banks, including the Bank of England (BOE) and the European Central Bank (ECB), also remain aggressive despite the recently downbeat economics and supply crunch fears. Additionally, the chatters over China’s inability to tame recession woes and the UK’s fears of more economic pain due to the latest fiscal policies should have favored the DXY but could not.

The reason could be linked to the downbeat US inflation expectations, as per the 10-year and 5-year breakeven inflation rates per the St. Louis Federal Reserve (FRED) data, which dropped to the lowest levels since early March 2021.

Amid these plays, the Wall Street benchmarks reversed all of the gains made on Wednesday while the Treasury yields recovered. Even so, the S&P 500 Futures print mild gains and weigh on the DXY amid a sluggish session ahead of the key US data.

Also read: US August PCE Inflation Preview: Will it trigger a dollar correction?

Technical analysis

The DXY’s first daily closing below the 10-DMA, around 112.40 by the press time, in two weeks direct the sellers towards the previous resistance line near 111.45.