USD Index bounces off multi-week lows near 110.00

• The sharp sell-off in the index meets support just below 110.00.
• US yields keep the corrective downside well in place so far on Wednesday.
• US trade deficit expected to widen to $92.22B in September.

The dollar remains entrenched in the negative territory on Wednesday, although it manages to rebound from lows in the sub-110.00 area when gauged by the USD Index (DXY).

USD Index weaker on Fed’s pivot, risk appetite

The intense improvement in the risk-associated universe continues to weigh on the greenback midweek, always amidst the continuation of the corrective retracement in US yields across the board.

In the meantime, the selling bias prevails around the dollar as investors continue to assess the probability that the Fed might introduce a pivot in its normalization plans as soon as in the next months. On this, some rate-setters have already hinted at a potential debate on the matter as soon as at the December meeting.

In the US data space, MBA Mortgage Applications contracted 1.7% in the week to October 21 and advanced Goods Trade Balance showed a $92.22B deficit during September. Later in the session, New Home Sales also for the month of September are due.

What to look for around USD

The dollar’s sharp decline seems to have met some initial contention around the 110.00 neighbourhood so far this week.

In the meantime, the firmer conviction of the Federal Reserve to keep hiking rates until inflation looks well under control regardless of a likely slowdown in the economic activity and some loss of momentum in the labour market continues to be the main factor underpinning the dollar, although this view could be put to the test amidst rising speculation of the introduction of a Fed’s pivot in the relatively short-term horizon.

Looking at the more macro scenario, the greenback also appears bolstered by the Fed’s divergence vs. most of its G10 peers in combination with bouts of geopolitical effervescence and occasional re-emergence of risk aversion.

Key events in the US this week: MBA Mortgage Applications, New Home Sales, Building Permits, Advanced Goods Trade Balance (Wednesday) – Flash Q3 GDP Growth Rate, Durable Goods Orders (Thursday) – PCE/Core PCE Price Index, Personal Income/Spending, Pending Home Sales, Final Michigan Consumer Sentiment (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Prospects for further rate hikes by the Federal Reserve vs. speculation of a recession in the next months. Geopolitical effervescence vs. Russia and China. US-China persistent trade conflict.

USD Index relevant levels

Now, the index is retreating 0.70% at 110.11 and the breach of 109.94 (monthly low October 26) would open the door to 109.35 (weekly low September 20) and finally 107.68 (monthly low September 13). On the other hand, the next up barrier lines up at 113.88 (monthly high October 13) seconded by 114.76 (2022 high September 28) and then 115.32 (May 2002 high).