USD Index climbs to fresh highs and targets 106.00 ahead of data, Powell

• The index adds to Tuesday’s strong gains and approaches 106.00.
• Markets now price in a 50 bps rate hike at the March 22 event.
• ADP report, Powell’s testimony next on tap in the calendar.

The greenback, in terms of the USD Index (DXY), maintains the bid tone well and sound and approaches the 106.00 zone on Wednesday.

USD Index looks at data, Powell

The index extends the upside momentum sparked in the wake of the first semiannual testimony by Chair Powell on Tuesday and trades at shouting distance from the 106.00 region.

Indeed, the dollar gathered fresh upside traction after Powell left the door open to a half percentage point interest rate hike at the Fed’s next meeting on March 22 and hinted at the idea that the ultimate interest rate will likely be higher than previously thought.

According to CME Group’s FedWatch Tool, the probability of a 50 bps rate raise later in the month is now at around 75%, from nearly 9% a month ago.

In the meantime, the US 2-year yields navigate above the 5% mark for the first time since June 2007, always amidst the broad-based move higher in the rest of the curve.

Data wise in the US, MBA Mortgage Applications are due in the first turn seconded by February’s ADP report, Balance of Trade, JOLTs Job Openings and the second semiannual testimony by Chief Powell, this time before the House Financial Services Committee.

What to look for around USD

The index accelerates the upside momentum and navigate in multi-month highs following the hawkish testimony by Fed’s Powell on Tuesday.

The probable pivot/impasse in the Fed’s normalization process narrative is expected to remain in the centre of the debate along with the hawkish message from Fed speakers, all after US inflation figures for the month of January showed consumer prices are still elevated, the labour market remains tight and the economy maintains its resilience.

The loss of traction in wage inflation – as per the latest US jobs report - however, seems to lend some support to the view that the Fed’s tightening cycle have started to impact on the still robust US labour markets somewhat.

Key events in the US this week: MBA Mortgage Applications, ADP Employment Change, Balance of Trade, Powell’s Semiannual Monetary Policy Report, Fed’s Beige Book (Wednesday) – Initial Jobless Claims (Thursday) – Nonfarm Payrolls, Unemployment Rate, Monthly Budget Statement (Friday).

Eminent issues on the back boiler: Rising conviction of a soft landing of the US economy. Persistent narrative for a Fed’s tighter-for-longer stance. Terminal rates near 5.5%? Fed’s pivot. Geopolitical effervescence vs. Russia and China. US-China trade conflict.

USD Index relevant levels

Now, the index is gaining 0.12% at 105.74 and faces the next up-barrier at 105.88 (2023 high March 8) seconded by 106.59 (200-day SMA) and then 107.19 (weekly high November 30 2022). On the other hand, the breakdown of 104.09 (weekly low March 1) would open the door to 103.50 (55-day SMA) and finally 102.58 (weekly low February 14).