USD Index extends the correction and challenges 101.00 ahead of FOMC

• The index loses further momentum and approaches 101.00.
• The Fed is anticipated to hike rates by 25 bps later on Wednesday.
• Markets’ attention remains on Powell’s upcoming comments.

The greenback, in terms of the USD Index (DXY), remains offered and trades close to the 101.00 region on Wednesday.

USD Index focused on the Fed

The index appears offered and initially adds to Tuesday’s pullback from tops in the 101.60/65 band amidst alternating risk appetite trends and the absence of clear direction in US yields across the curve.

In the meantime, market participants remain cautious ahead of the imminent FOMC gathering, where a 25 bps interest rate hike is widely anticipated. However, investors are expected to closely follow Chief Powell’s press conference as well as any hint regarding the potential next steps by the Fed when it comes to the continuation (or not) of its tightening campaign.

Other than the FOMC event, the US calendar will show the usual weekly MBA Mortgage Applications and New Home Sales for the month of June.

What to look for around USD

The rally in the index seems to have met an initial hurdle around 101.60 (July 25) amidst rising expectations prior to the FOMC interest rate decision later in Wednesday’s session.

So far, the Fed is largely predicted to raise the Fed Funds Target Range (FFTR) by another 25 bps later in the session, in line with the Committee’s views observed at the June’s meeting as well as comments from the Fed’s rate setters in past weeks.

However, the persistent disinflationary pressures seen in recent months, in addition to some cooling in the labour market, might open the door to the likelihood that the July rate raise could be the last one of the current hiking cycle.

Key events in the US this week: MBA Mortgage Applications, New Home Sales, Fed Interest Rate Decision (Wednesday) – Durable Goods Orders, Advanced Q2 GDP Growth Rate, Initial Jobless Claims, Flash Goods Trade Balance, Pending Home Sales (Thursday) – PCE, Core PCE, Personal Income, Personal Spending, Final Michigan Consumer Sentiment (Friday).

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

USD Index relevant levels

Now, the index is down 0.10% at 101.21 and faces immediate contention at 100.00 (psychological level) prior to 99.57 (2023 low July 13) and then 97.68 (weekly low March 30). On the flip side, the breakout of 101.64 (weekly high July 25) would open the door to 102.60 (55-dat SMA) and finally 103.54 (weekly high June 30.