USD Index looks offered near 103.30 ahead of US CPI

• The index appears offered near monthly lows around 103.30.
• US CPI is expected to extend the downward bias in May.
• The Fed starts its 2-day meeting later on Tuesday.

The USD Index (DXY), which tracks the greenback vs. a basket of its main rival currencies, resumes the downtrend and trades at shouting distance from monthly lows near 103.30 on turnaround Tuesday.

USD Index looks at US CPI, Fed

The index slips back to the lower end of the recent range and leaves behind two consecutive daily advances on Tuesday on the back of the firmer tone in the risk complex and ahead of the publication of crucial US inflation figures for the month of May.

On the latter, investors expect the disinflationary pressures to have remained unchanged during the last month, which in turn underpins the most likely pause in the Fed’s tightening campaign.

So far, FedWatch Tool sees the probability of an impasse at the FOMC event on Wednesday at nearly 76%, while a 25 bps rate hike remains the preferred scenario at the July 26 gathering.

Other than the Inflation Rate, the US docket includes the NFIB Business Optimism Index.

What to look for around USD

The index remains under pressure and challenges the area of June lows around 103.30/20.

In the meantime, bets of another 25 bps at the Fed’s next gathering in June reversed course in spite of the steady resilience of key US fundamentals (employment and prices, mainly) and have dented the recent rally in the dollar.

Bolstering a pause by the Fed instead appears to be the extra tightening of credit conditions in response to uncertainty surrounding the US banking sector.

Key events in the US this week: Inflation Rate (Tuesday) – MBA Mortgage Applications, Producer Prices, FOMC Interest Rate Decision, Powell press conference (Wednesday) – Initial Jobless Claims, Philly Fed Manufacturing Index, Retail Sales, NY Empire State Index, Industrial Production, Business Inventories, TIC Flows (Thursday) – Flash Michigan Consumer Sentiment (Friday).

Eminent issues on the back boiler: Persistent debate over a soft/hard landing of the US economy. Terminal Interest rate near the peak vs. speculation of rate cuts in late 2023/early 2024. Fed’s pivot. Geopolitical effervescence vs. Russia and China. US-China trade conflict.

USD Index relevant levels

Now, the index is losing 0.30% at 103.31 and faces the next support at at 103.24 (monthly low June 12) seconded by 103.02 (100-day SMA) and finally 102.53 (55-day SMA). On the flip side, the breakout of 104.69 (monthly high May 31) would open the door to 105.38 (200-day SMA) and then 105.88 (2023 high March 8).