USD Index regains upside traction and targets 104.00 ahead of CPI

• The index bounces off recent lows and approaches 104.00.
• Bets for a pause in the Fed’s tightening cycle remain on the rise.
• All the attention will be on the release of US inflation figures.

The greenback seems to have met some respite from the recent sharp selling pressure and approaches the 104.00 region when tracked by the USD Index (DXY) on turnaround Tuesday.

USD Index now looks at CPI and SVB

After three consecutive daily pullbacks - including a 4-week low near 103.50 recorded on Monday - the index now manages to retarget the 104.00 zone amidst some tepid recovery in the short end of the US yields curve and the knee-jerk in the risk complex.

In the meantime, investors continue to closely follow the aftermath of the SVB collapse and the shutdown of the New York-based Signature Bank, which sparked contagion fears on both sides of the Atlantic as well as a pick-up in the risk aversion.

By the same token, the probability of a 25 bps rate hike now hover around the 75% according to FedWatch Tool from CME Group, while bets for a no-hike remain on the rise.

Moving forward, all the attention will be on the release of US inflation figures gauged by the CPI for the month of February, due later in the NA session.

What to look for around USD

The index manages to grab some oxygen and rebounds from the sharp decline to 4-week lows seen at the beginning of the week.

The latest results from the US jobs report coupled with the ongoing effervescence around the US banking system threat the greenback and collaborate with investors’ view of a 25 bps rate hike at the March gathering, all sponsoring the corrective decline in the USD Index (DXY) from last week’s 2023 highs in the boundaries of the 106.00 region to Monday’s 103.50 zone.

So far, the index remains under pressure against the backdrop of reinvigorated bets of a Fed’s pivot in the short-term horizon. However, the still elevated inflation and the resilience of the US economy continue to play against that view.

Key events in the US this week: Inflation Rate (Tuesday) – MBA Mortgage Applications, Producer Prices, Retail Sales, Business Inventories, NAHB Housing Market Index, TIC Flows (Wednesday) – Initial Jobless Claims, Housing Starts, Building Permits, Philly Fed Manufacturing Index (Thursday) – Industrial Production, Flash Michigan Consumer Sentiment, CB Leading Index (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 advancing 0.26% at 103.89 and faces the next hurdle at 105.88 (2023 high March 8) seconded by 106.63 (200-day SMA) and then 107.19 (weekly high November 30 2022). On the flip side, the breakdown of 103.48 (monthly low March 13) would open the door to 102.58 (weekly low February 14) and finally 100.82 (2023 low February 2).