US Dollar Index: Yields test DXY bulls around multi-day top, US PCE Inflation in focus

• US Dollar Index fades upside momentum after refreshing seven-week top.
• Strong US data amplifies hawkish Fed concerns but yields suggest the moves are already priced in.
• US Core PCE Price Index for January will be crucial for immediate directions, geopolitical headlines are also important to watch.

US Dollar Index (DXY) bulls struggle to keep the reins around mid-104.00s, following a run-up to refresh the seven-week high to 104.78 mark, as traders await the Federal Reserve’s (Fed) favorite inflation number on Friday.

Upbeat US data joined geopolitical fears emanating from China and Russia underpinned the US Dollar’s run-up to refresh multi-day high. However, a pullback in the US Treasury bond yields, mainly on concerns that the strong data are already priced in the latest hawkish Fed moves, as well as in the expectations for the near-future moves, seems to have probed the DXY bulls afterward.

That said, Thursday’s second reading of the US Gross Domestic Product Annualized, better known as Real GDP, eased to 2.7% for the fourth quarter (Q4) versus 2.9% first forecasts. However, the Personal Consumption Expenditure (PCE) Price and Core PCE for the said period rose to 3.7% and 4.3% QoQ versus 3.2% and 3.9% respective first estimations. Additionally, the Chicago Fed National Activity Index improved to 0.23 in January from -0.46 (revised), versus 0.03 analysts’ estimates. On the same line, Initial Jobless Claims also eased to 192K for the week ended on February 17 from 195K (revised) prior, compared to 200K expected.

Elsewhere, the US 10-year Treasury bond yields marked a two-day downtrend near 3.89%, following a run-up to refresh a three-month high.

It should be noted that the absence of a fresh boost to the hawkish Fed concerns, other than what’s already known to the markets, seemed to have triggered the latest DXY retreat, especially ahead of the key US inflation data.

On the same line could be the recently mixed headlines surrounding China. On Thursday, US Treasury Secretary Janet Yellen signaled that the US will resume discussions with China on economic issues 'at an appropriate time' whereas China’s Commerce Ministry urged the US to create good conditions for trade with China. The news managed to trigger the pair’s bounce off a multi-day low on Thursday. On the same line were statements from China’s commerce ministry spokesperson who said, the recovery momentum in the country’s consumer market was strong in January while also adding, “The government will take more measures to revive and expand consumption.”

Elsewhere, the latest headlines suggesting China’s readiness to supply combat drones to Russia and the US Senators’ push to halt Chinese carriers overflying Russia on US flights seem to renew the market fears and put a floor under the US Dollar Index.

Against this backdrop, S&P 500 Futures print mild losses despite Wall Street’s positive closing.

Moving ahead, geopolitical headlines and Japan’s return from holiday may entertain DXY traders ahead of the US Personal Consumption Expenditures (PCE) Price Index data for January. That said, The PCE Price Index is expected to have risen by 4.9% YoY in January, versus 5% prior. Further, the more relevant Core PCE Price Index, known as Fed’s favorite inflation gauge, is likely eased to 4.3% YoY, compared 4.4% prior.

Also read: US PCE Inflation Preview: Can the US Dollar turn bullish for good?

Technical analysis

A convergence of the 100-day Exponential Moving Average (EMA) and 200-EMA, around 104.85-90 at the latest, appears a tough nut to crack for the US Dollar Index (DXY) bulls. The pullback moves, however, remain elusive unless breaking a three-week-old support line, close to 104.30 by the press time.