US Dollar Index: DXY ignores Fed talks to renew three-week low under 102.00 as inflation expectations slump

• US Dollar Index stays pressured at two-week low, licking its wounds after declining in the last three consecutive days.
• Aftershocks of downbeat US NFP weighs on yields and DXY amid cautious optimism.
• Fed officials keep supporting 0.50% rate hikes in 2023.
• US inflation numbers are the key for fresh impulse.

US Dollar Index (DXY) remains on the back foot at the lowest levels in three weeks, after declining in the last three consecutive days, as bears prod the 101.90 support amid the early hours of Tuesday’s Asian session. In doing so, the greenback’s gauge versus the six major currencies bears the burden of Friday’s downbeat US employment data and the softer US Treasury bond yields despite hawkish comments from the Federal Reserve (Fed) officials. Also exerting downside pressure on the DXY is the risk-on mood even as China flags economic fears.

Recently, San Francisco Fed President Mary Daly said, "We're likely to need a couple more rate hikes over the course of this year to really bring inflation sustainably back to the Fed's 2% goal." On the same line, Cleveland Fed President Loretta Mester also said that the Fed will need to tighten the monetary policy "somewhat further" to lower inflation. Furthermore, Federal Reserve Vice Chair for Supervision Michael Barr said, "We are quite attentive to bringing inflation down to target." 

The hawkish comments from the Fed officials fail to lure the US Dollar Index buyers amid Friday’s downbeat US jobs report and the recently softer US inflation expectations.

As per the Federal Reserve Bank of New York's monthly Survey of Consumer Expectations, the US consumers' one-year inflation expectation dropped to the lowest level since April 2021 at 3.8% in June from 4.1% in May.

On the other hand, the latest US employment report for June marked a negative surprise and offered a big blow to the US Dollar, making it post the biggest daily loss in three weeks. However, Monday’s downbeat prints of China inflation data flagged fears of deflation in the world’s biggest industrial player, which in turn allowed the US Dollar to lick its wounds.

That said, the headline US Nonfarm Payrolls (NFP) marked the first below-expectations print in 15 months while falling to 209K, versus 225K market forecasts and 309K prior (revised), whereas the Unemployment Rate matches analysts’ estimations of 3.6% compared to 3.7% prior. On the other hand, China’s Consumer Price Index (CPI) eased to 0.0% YoY in June versus 0.2% prior while the Producer Price Index (PPI) slipped beneath the -4.6% yearly prior marked in May to -5.4%.

Following the downbeat US jobs report, Federal Reserve Bank of Chicago President Austan Goolsbee said that they don't need a recession to eliminate inflation concerns. The policymaker also added, “It is clear the job market is strong but cooling.”

Amid these plays, Wall Street closed positive while the US Treasury bond yields dropped. That said, the benchmark US 10-year Treasury bond yields printed the first daily loss in July the previous day whereas the two-year counterpart declined for the second consecutive day, to respectively near 4.00% and 4.86%

Looking ahead, DXY traders will pay attention to the risk catalysts ahead of Wednesday’s US inflation numbers for clear directions.

Technical analysis

A daily closing beneath a three-month-old rising support line, now immediate resistance around 102.25, needs validation from the previous monthly low of around 101.90 to convince the US Dollar Index bears.