US Dollar Index: DXY defends 103.00 as China, recession talks entertain bulls ahead of Fed Minutes

• US Dollar Index bounces off intraday low to pare the first daily loss in three.
• US-China trade war news, yield curve inversion weigh on sentiment and provide tailwind to DXY.
• Softer US data challenge immediate upside even as Fed bets remain hawkish.
• Fed Minutes need to confirm Powell’s “two more rate hikes for 2023” to defend US Dollar Index bulls.

US Dollar Index (DXY) picks up bids to reverse the day-start consolidation of recent gains around 103.00 as markets brace for an active day amid early Wednesday, after the US Independence Day holiday restricted the moves the previous day.

It’s worth noting that the softer US data and the preparations for today’s key Fed Minutes might have allowed the DXY bulls to take a breather amid the early day, following a two-day uptrend. However, fresh fears about the US-China trade war and the economic slowdown join the hawkish Fed bets to underpin the US Dollar’s run-up.

Fears of the US-China trade war escalate as China announced abrupt controls on exports of some gallium and germanium products, effective from August 1. The dragon nation’s latest retaliation is in reaction to the US curb on AI chips’ shipments to Beijing.

Previously, the Wall Street Journal (WSJ) added to the market’s fears about the Sino-American ties while saying, “The Biden administration is preparing to restrict Chinese companies’ access to U.S. cloud-computing services, according to people familiar with the situation, in a move that could further strain relations between the world’s economic superpowers.”

On Monday, China’s President Xi Jinping said in a virtual SCO summit on Tuesday that they “should focus on practical cooperation and accelerate economic recovery. The policymaker also added, “(They) Need to strengthen strategic communication and coordination, respect each other's core interests and concerns.” It should be observed that US Treasury Secretary Janet Yellen is in Beijing. Earlier on Tuesday, US Treasury Department said, per Reuters, “Treasury Secretary Janet Yellen had a 'frank and productive' discussion today with China's Ambassador.” The news also mentioned that US Treasury Secretary Yellen raised issues of concern while also conveying the importance of the two countries working together.

On the other hand, the US yield curve inversion flags the recession woes as the difference between the US 10-year and two-year Treasury bond yields marked the widest inversion in 42 years on Monday.

It should be noted that the downbeat prints of the US ISM Manufacturing PMI and S&P Global PMIs for June prod the US Dollar despite its haven status that gained attention amid market fears.

While portraying the mood, the S&P00 Futures print mild losses whereas the US 10-year and two-year Treasury bond yields remain mostly unchanged near 3.85% and 4.90% by the press time.

Moving forward, the Federal Open Market Committee (FOMC) Minutes for the June meeting will be crucial for the DXY traders to watch as the Fed policymakers announced a pause in the rate hike during that meeting. Should the Fed policymakers fail to defend the hawkish bias, the DXY will have further upside to track.

Technical analysis

Although a fortnight-long rising support line restricts the immediate US Dollar Index downside near the 103.00 threshold, the DXY upside appears elusive unless witnessing a daily close beyond a five-week-old descending resistance line, around 103.40 at the latest.