USD Index treads water around 103.30 ahead of FOMC

• The index trades in a tight range near 103.30 on Wednesday.
• Tuesday’s drop in US CPI gives green light to a Fed’s pause.
• Investors still see the Fed hiking rates in the July 26 event.

The greenback, when tracked by the USD Index (DXY), navigates a very narrow range around the 103.30 region on Wednesday.

USD Index looks at the Fed

The index manages to put some distance from Tuesday’s monthly lows near the 103.00 neighbourhood amidst the dominating pre-Fed cautiousness among market participants midweek.

In the meantime, it is largely anticipated that the Fed will leave the Fed Funds Target Range (FFTR) unchanged at 5.00%-5.25% at its meeting later on Wednesday. However, investors continue to price in the resumption of the hiking cycle in July with another 25 bps rate hike amidst current disinflationary pressures and sticky core inflation.

The release of the weekly Mortgage Applications tracked by MBA will complete the US docket on Wednesday.

What to look for around USD

The index trades in an inconclusive fashion around 103.30 amidst the usual pre-Fed lull.

In the meantime, bets for another 25 bps rate hike at the Fed’s gathering in July remain well on the cards against the backdrop of the steady resilience of key US fundamentals (employment and prices, mainly).

Bolstering a pause by the Fed this month appears to be the extra tightening of credit conditions in response to uncertainty surrounding the US banking sector and the need for policymakers to assess the so-far effects of the tightening campaign.

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 gaining 0.03% at 103.33 and the breakout of 104.69 (monthly high May 31) would open the door to 105.35 (200-day SMA) and then 105.88 (2023 high March 8). On the downside, the next support emerges at 103.04 (monthly low June 12) seconded by 102.55 (55-day SMA) and finally 100.78 (2023 low April 14).