US Dollar Index drops to 113.00 despite hawkish Fed bets, cautions optimism in play

• US Dollar Index takes offers to renew intraday low, snaps two-week uptrend.
• Headlines from the UK, light calendar allows DXY bulls to take a breather.
• Fed’s 75 bps rate hike appears certain as policymakers, data favor the hawkish move.
• Risk catalysts may entertain traders, suggesting a pullback amid a sluggish start to the week.

US Dollar Index (DXY) retreats to 113.00, pausing a two-week uptrend amid Monday’s sluggish Asian session, as market sentiment improves and the Treasury yields retreat. Even so, hawkish Fed bets probe the DXY sellers as traders begin a light calendar week.

The recent improvement in the market’s mood could be linked to the headlines from China and the UK. Also, a light calendar in Asia allows the DXY buyers to take a breather.

That said, the firing of Britain’s Chancellor Kwasi Kwarteng and hints of more rate hikes from the Bank of England (BOE) Governor Andrew Bailey are the recent catalysts that triggered the market’s risk-on mood during the initial hours of Monday. The measures appear promising and likely avoiding the risk of the UK market’s collapse, at least for now.

Elsewhere, China's 20th Communist Party Congress began on Sunday, with Xi Jinping poised to clinch his third five-year stint in charge - a mandate that would secure him as the country's most powerful ruler since founding leader Mao Zedong stated Reuters. The hopes of stability in the world’s second largest economy seem to also favor the risk-on mood event as the dragon nation’s zero-covid policy and recent geopolitical tussles with the US raise challenge to the market sentiment.

Amid these plays, S&P 500 Future ignore Wall Street’s downside close and rise half a percent while the US 10-year Treasury yields struggle to extend the latest upside near the 4.0% threshold. It’s worth noting that CME’s Fedwatch Tool suggests nearly 95% chance of the 0.75% Fed rate hike in November.

The DXY managed to reverse Thursday’s notable losses after upbeat US data and hawkish Fedspeak on Friday. US Retail Sales remained unchanged with 0.0% growth for September versus 0.2% expected 0.4% upwardly revised prior. Further, the preliminary readings of the Michigan Consumer Sentiment Index for October was 59.8, better than the forecasted figure of 59 and 58.6 previous readings. More importantly, the University of Michigan’s 1-year and 5-year inflation expectations increased for October, respectively to 2.9% and 5.1% compared to 2.7% and 4.7% priors in that order.

During the weekend, St. Louis Federal Reserve Bank President James Bullard said, “US has a serious inflation problem,” the policymaker also adds, “Front loading fed policy is the right strategy.”

Looking ahead, the US economic calendar has very few data/events scheduled for publication during the week, which in turn allows the buyers to take a breather and tease the DXY sellers should the latest optimism extends. As a result, risk catalysts will be more important for clear directions.

Technical analysis

Multiple failures to cross the 113.30 hurdle on a daily closing basis suggests further pullback of the DXY towards the 21-DMA support near 112.55.