US Dollar Index bounces off weekly low amid unimpressive US inflation, hawkish Fed bets

• US Dollar Index probes two-day downtrend near the weekly bottom.
• Fed talks defend rate hike bias despite softer US inflation.
• Treasury yields renew multi-day high following the US CPI on upbeat Fed talks and propel DXY’s rebound.
• US Retail Sales, second-tier data eyed for fresh impulse.

US Dollar Index (DXY) stays defensive around 103.30, following the bounce off a one-week low, as the greenback bulls await more clues to snap a two-day downtrend during early Wednesday.

The greenback’s gauge versus six major currencies dropped to the lowest level in a week the previous day as the US inflation data initially failed to impress US Dollar bulls. However, the hawkish Federal Reserve (Fed) comments propelled the US Treasury bond yield and the DXY afterward.

US Consumer Price Index (CPI) rose past market expectations to 6.4% YoY but posted the slowest increase since 2021 while easing below 6.5% prior. More importantly, CPI ex Food & Energy, better known as the Core CPI, grew 5.6% YoY compared to 5.5% market forecasts and the 5.7% previous readings.

Following the data, most of the Federal Reserve (Fed) policymakers were in favor of further rate hikes even as the United States inflation failed to match “positive surprise” hopes. The same propelled the US Treasury bond yields and US Dollar. That said, Dallas Fed President Lorie Logan stated that they must remain prepared to continue rate increases for a longer period than previously anticipated. On the same line was New York Fed President John Williams who noted that the work to control too high inflation is not yet done. Additionally, Philadelphia Fed President Patrick Harker signaled that they are not done (with lifting rates), but they are likely close.

As a result, US 10-year Treasury bond yields seesaw around 3.75%, up three basis points (bps) after refreshing a six-week high whereas the two-year counterpart jumped to the highest level since early November 2022 by poking 4.62%. The same joined day-end losses of Wall Street to underpin the DXY rebound.

However, the US Dollar Index traders should pay attention to Wednesday’s US Retail Sales and Industrial Production details for January, as well as NY Empire State Manufacturing Index for February, to confirm the hawkish Fed bias and keep the recovery moves intact.

Technical analysis

Unless providing a successful daily close beyond the 50-DMA, around 103.40 by the press time, the US Dollar Index remains on the bear’s radar and can keep poking the 21-DMA support, close to 102.50 at the latest.