US Dollar Index licks its wounds at six-month low near 104.00 ahead of Fed’s verdict

• US Dollar Index struggles to defend the bounce off the lowest levels since June, marked the previous day.
• DXY dropped the most in two weeks to refresh multi-day low on downbeat US inflation data.
• Hawkish Fed bets retreat as US CPI slows down the most in over a year.
• Fed’s 50 bps rate hike is almost given, signals for futures moves will be crucial to watch.

US Dollar Index (DXY) flirts with 104.00 during early Wednesday, after falling to the lowest levels in six months the previous day. In doing so, the greenback’s gauge versus the six major currencies portray the cautious mood ahead of today’s Federal Open Market Committee (FOMC) monetary policy meeting.

The DXY reported the biggest daily slump in two weeks while refreshing the multi-day low on Tuesday after the US inflation data raised hopes that Fed will ‘pivot’ sooner during early 2023.

That said, US Consumer Price Index (CPI) dropped to 7.1% YoY in November versus the 7.3% expected and 7.7% prior. Further, the CPI ex Food & Energy, known as the Core CPI, also declined to 6.0% YoY during the stated month compared to 6.1% market forecasts and 6.3% previous readings. “Traders of futures tied to the Federal Reserve’s policy rate boosted bets Tuesday that the U.S. central bank will notch down its interest-rate hike pace further early next year, after a government report showed inflation eased sharply in November,” said Reuters.

Additionally, helping the DXY to remain stable could be the headlines surrounding China that challenges the previous optimism for the dragon nation. the International Monetary Fund (IMF) Managing Director Kristalina Georgieva was spotted expecting slower economic growth for China due to the latest jump in the daily Covid cases. Additionally, Bloomberg came out with the news suggesting that the Chinese leaders delayed the economic policy meeting due to the COVID-19 problems.

Amid these plays, Wall Street closed positive but the S&P 500 Futures struggle for clear directions. Further, the US Treasury bond yields also remain sidelined after declining the most in a week to snap three-day uptrend.

Given the pre-Fed caution, the DXY may witness further sidelined performance as the latest US CPI challenges the policy hawks. Also, the already-given 50 bps rate hike and lesser odds of witnessing any surprises from the FOMC adds to the market’s action. However, a surprise from the Fed, either in the form of rate hike directions or economic projections, won’t be taken lightly.

Technical analysis

Unless providing a daily closing beyond a three-week-old descending resistance line, around 104.90 by the press time, DXY remains pressured towards May 2022 low of 105.30.