US Dollar Index: DXY licks SVB-inflicted wounds as Fed bets dwindle, US inflation, yields in focus

• US Dollar Index bears take a breather after posting the biggest daily fall in two months.
• US two-year Treasury bond yields marked the biggest slump since October 1987, Fed bets reverberate.
• US CPI for February may offer intermediate directions but risk catalysts are more important for clear directions.

US Dollar Index (DXY) seesaws around 103.65-70, after posting the biggest daily slump since mid-January, as US Dollar traders reassess the previous day’s volatile start of the week amid the US banking regulators’ defense of the Silicon Valley Bank (SVB) and the Signature Bank.

It’s worth noting that the greenback’s gauge versus six major currencies bear the burden of the downbeat US Treasury bond yields as the SVB fallout highlights the US banking sector’s fragility even as the policymakers stay ready to tame financial market risk. The fears of the market’s ability to stay afloat, as well as without any financial crisis, seem to weigh on the US Treasury bond yields and the Fed fund futures.

That said, US two-year Treasury bond yields marked the biggest daily slump since October 1987 by declining more than 13.0% on a day as US banking regulators rushed to defend the Silicon Valley Bank (SVB) and the Signature Bank. Further, the US 10-year Treasury bond yields slumped to the monthly low amid a sudden shift in the market’s Fed bets due to the financial market risks emanating from the stated banks.

On the other hand, the US Fed Fund Futures have priced in a 69% chance of a 25-bps hike at next week's Fed policy meeting, with a more than 30% probability of a pause. The market last week was poised for a 50-bps increase prior to the SVB collapse, reported Reuters. On the same line could be CME mentioned, “Traders see 33% chance Fed holds rates this month, market pricing shows rate cuts expected as early as June.”

Amid these plays, plays Wall Street closed mixed while the US Treasury bond yields lick their wounds ahead o the key US Consumer Price Index (CPI) data for February. Forecasts suggest the US CPI is likely to ease to 6.0% YoY versus 6.4% prior while CPI ex Food & Energy may slide to 5.5% YoY from 5.6% prior. Although the US inflation numbers could help better understand the market’s recent shift in the Fed bets, mainly due to the last week’s upbeat US jobs report, major attention should be given to the yields and the market’s risk catalysts for better directions.

Also read: US Inflation Preview: Five scenarios for trading the Core CPI whipsaw within the SVB storm

Technical analysis

A daily closing below the 50-DMA support, around 103.45 by the press time, becomes necessary for the US Dollar Index (DXY) bears to keep the reins.