USD Index looks weaker, drops to 7-month lows near 102.30

• The index drops well south of the 103.00 mark on Thursday.
• US disinflation remained well in place in December.
• US yields extend the decline post-US CPI.

The USD Index (DXY), which measured the greenback vs. a bundle of its main rival currencies, gathers extra downside pressure and revisits the 102.30 region for the first time since early April.

USD Index breaches 103.00 on US inflation

The index exacerbates its decline after US inflation figures extended the decline in December. In fact, the headline CPI rose 6.5% over the last twelve months and the Core CPI rose 5.7% from a year earlier, clinching the sixth consecutive monthly pullback.

The dollar derives extra selling pressure from the initial drop in US yields, although the belly and the long end of the curve manage to trim part of that knee-jerk so far.

Another month with lower inflation figures reinforces investors’ perception of an imminent pivot in the Fed’s tightening cycle, which also morphed into increasing bets of a 25 bps rate hike at the February 1 event.

Additional results in the US calendar saw weekly Claims increase by 205K in the week to January 7, bettering initial estimates and sustaining the view of a (still) healthy labour market.

What to look for around USD

The dollar remains under pressure and looks to rebound from post-US CPI lows in multi-month lows in the 102.35/30 band.

Another soft prints from US inflation figures in December prop up the idea of a probable pivot in the Fed’s policy in the next months, which also comes in contrast to the hawkish message from the latest FOMC Minutes and recent rate-setters, all pointing to the need to remain within a restrictive stance for longer, at the time when the likelihood any interest rate reduction in the current year remains near zero.

On the latter, the tight labour market and the resilience of the economy are also seen supportive of the firm message from the Federal Reserve and its hiking cycle.

Key events in the US this week: Inflation Rate, Initial Jobless Claims, Monthly Budget Statement (Thursday) – Flash 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. Fed’s pivot. Geopolitical effervescence vs. Russia and China. US-China trade conflict.

USD Index relevant levels

Now, the index is retreating 0.10% at 103.15 and the breach of 102.32 (monthly low January 9) would open the door to 101.29 (monthly low May 30) and finally 100.00 (psychological level). On the other hand, the next up barrier comes at 105.63 (monthly high January 6) followed by 106.38 (200-day SMA) and then 107.19 (weekly high November 30).