US Dollar Index: DXY licks its wounds at five-week low above 102.00 amid mixed Fed, macro catalysts

• US Dollar Index stays defensive near the lowest levels in five weeks, grinds higher of late.
• Juneteenth holiday allows DXY to pare recent losses amid hawkish Fed bias, mixed US data.
• Risk catalysts, Fed chatters will be the key to watch amid a light calendar ahead of Fed Chair Powell’s Testimony, PMIs.

US Dollar Index (DXY) pares recent losses around 102.30-40 amid a sluggish Monday morning in Asia. In doing so, the greenback’s gauge versus six major currencies justifies the market’s lack of interest due to the Juneteenth holiday in the US. Also allowing the DXY to pare the latest losses could be the hawkish Fed concerns. However, the mixed US data and comparatively hawkish European Central Bank (ECB) moves keep US Dollar bears hopeful.

Preliminary readings of the University of Michigan (UoM) Consumer Sentiment Index (CSI) for June improved but the US inflation expectations eased and tamed the US Dollar bulls. Even so, Fed policymakers have been hawkish of late and allowed the DXY to consolidate recent losses amid a sluggish start to another key week. It’s worth noting that the US Dollar Index dropped the most since early January in the last week.

That said, the latest US Federal Reserve (Fed) Monetary Policy Report to the US Congress, published Friday stated, “Inflation in the US is well above target and the labor market remains very tight,” as per Reuters. The report also mentioned, per Reuters, “Outlook for funds rate is subject to considerable uncertainty.”

It should be noted that Richmond Fed President Thomas Barkin said, “Raising rates further could create the risk of a more significant slowdown in the economy.” The policymaker, however, also added that the Fed can do comfortable more to slow the resilient US economy, which in turn triggered a jump in the 2-year Treasury bond yields to 4.75% and helped the US Dollar to get off the lows. Not only Fed’s Barkin but Chicago Fed President Austan Goolsbee and Federal Reserve Governor Christopher Waller also appeared a bit hawkish and helped the DXY to reverse from a multi-day low the previous day.

Alternatively, downbeat US inflation, Retail Sales and Fed’s hawkish pause join the risk-positive news from China to prod the DXY bulls.

During the weekend, US Secretary of State Antony Blinken and Chinese Foreign Minister Qin Gang held “candid and constructive talks” on their differences from Taiwan to trade, per Reuters. Though, the news also mentioned that the diplomats seemed to agree on little beyond keeping the conversation going with an eventual meeting in Washington, reported Reuters. Further, news from the South China Morning Post (SCMP) quoting China State Council also flashes positive signals for the sentiment as it said, “The Council considered a batch of macroeconomic policies designed to expand ‘effective demand’, strengthen the real economy and defuse risks in key areas.”

Against this backdrop, S&P500 Futures tracks Wall Street’s mild losses amid an absence of the US stock and bond market players on Monday, which in turn can prod the DXY moves looking forward. However, Fed Chairman Powell’s bi-annual testimony, as well as PMIs for June, will also be important to watch for clear directions.

Technical analysis

US Dollar Index bounces off a two-month-old ascending support line, near 102.05 at the latest, but the recovery moves remain elusive unless the quote stays below the 50-DMA hurdle of around 102.60.