US Dollar Index: Hawkish Fed signals, geopolitical fears favor DXY bulls near 104.50

• US Dollar Index bulls take a breather at weekly top after two-day uptrend.
• FOMC Minutes, Fed talks favor higher rates, China-Russia ties signal amplify geopolitical woes.
• Retreat in yields, mixed equities probe DXY bulls ahead of key data.

US Dollar Index (DXY) seesaws near 104.50, grinding higher around the weekly top, as the greenback bulls cheer hawkish Federal Reserve (Fed) concerns amid geopolitical fears during early Thursday. In doing so, the greenback’s gauge versus the six major currencies seeks fresh directions to extend the two-day uptrend, which in turn highlights today’s data that provides early signals for the US inflation and output conditions.

Although US President Joe Biden thinks that his Russian counterpart isn’t up to using nuclear arms by backing off an international treaty, the fears surrounding the Ukraine-Russia war are far from over, with the latest edition of the West and China escalating the matter to worse. That said, the Wall Street Journal (WSJ) recently said that the US is considering the release of intelligence on China’s potential arms transfer to Russia.

Previously, comments from China's top diplomat Wang Yi and Russian President Putin weigh on the sentiment and propelled the US Dollar Index (DXY). China’s Diplomat Wang Yi met Russian President Vladimir Putin and said that they are ready to deepen strategic cooperation with Russia on Wednesday, as reported by Reuters. The Chinese policymaker also added that their relations will not succumb to pressure from third countries. Meanwhile, Putin noted that it's very important for them to have a cooperation with China and said he is looking forward to Chinese President Xi Jinping visiting Moscow.

On the other hand, hawkish Federal Reserve (Fed) Minutes and statements suggesting higher interest rates from the Fed officials also favor the US Dollar’s demand. As per the latest Federal Open Market Committee’s (FOMC) Monetary Policy Meeting Minutes, all participants agreed more rate hikes are needed to achieve the inflation target while also favoring further Fed balance sheet reductions.

On the same line, St. Louis Federal Reserve President James Bullard also mentioned that the Fed will have to go north of 5% to tame inflation, as reported by Reuters. The policymaker also stated that he believes there are good chances they could beat inflation this year without creating a recession. Additionally, Federal Reserve Bank of New York President John Williams highlighted the concerns favoring the Fed’s higher rates by saying, per Reuters, “Fed is absolutely committed to getting inflation back to 2%.”

It’s worth noting, however, that a retreat in the US Treasury bond yields and mixed performance of equities, amid hopes that the economic slowdown woes are off the table, seemed to have probed the US Dollar Index bulls. That said, the US 10-year and two-year Treasury bond yields retreated from their three-month high as Wall Street closed mixed whereas the S&P 500 Futures remain mildly bid of late.

Looking ahead, the second estimations of the US Personal Consumption Expenditures (PCE) details for the fourth quarter (Q4), as well as the preliminary readings of the US Q4 Gross Domestic Product (GDP), will be important for fresh directions. Although the scheduled figures are likely to confirm the initial forecasts, any surprises won’t be taken lightly and hence should be observed with care for clear directions.

Technical analysis

A sustained trading of the US Dollar Index (DXY) beyond a three-week-old ascending support line, near 104.00 by the press time, directs DXY bulls toward a convergence of the 100-day and 200-day Exponential Moving Average (EMA), around 104.85-90 at the latest.