US Dollar Index pares gains at 20-year high, central banks, US data in focus

• US Dollar Index renews intraday low, snaps two-day uptrend near the multi-year top.
• Risk-aversion ebbs amid a light calendar, pre-data anxiety.
• Fears of recession, central bank intervention joins firmer yields to propel DXY.
• Firmer prints of the US CB Consumer Confidence, Durable Goods Orders could amplify US dollar strength.

US Dollar Index (DXY) takes offers to refresh its intraday low near 113.70 as it consolidates the latest gains around the two-decade high, marked the previous day, during Tuesday’s Asian session.

In doing so, the greenback’s gauge versus the six major currencies portrays the market’s indecision amid a light calendar and anxiety ahead of the critical US data. Also challenging the US dollar bulls could be the recent softer US data and inflation expectations.

That said, Chicago Fed National Activity Index weakened to 0.0 in August versus 0.09 market expectations and an upwardly revised prior reading of 0.29. Further, the US inflation expectations as per the 10-year and 5-year breakeven inflation rates per the St. Louis Federal Reserve (FRED) data, signaled that the gauges refreshed the multi-day low on Monday. While noting the details, the longer-term inflation expectations dropped to the lowest since July 13, 2022. In contrast, the 5-year benchmark slumped to the lowest levels since June 2021 with the latest figures being 2.32% and 2.33% respectively.

On Monday, the DXY rallied to the highest levels since May 2002 as risk-aversion intensified after the GBP/USD pair’s slump to the all-time low. The sour sentiment also took clues from the firmer yields and the hawkish Fedspeak, as well as the fears that many central banks need to intervene to defend their respective currencies.

The US 10-year Treasury yields rose to the highest levels in 12 years while the 2-year bond coupons refreshed the 15-year top as traders rushed to the risk safety. Further, Boston Fed President Susan Collins said, per Reuters, “Getting inflation down will require slower employment growth, somewhat higher unemployment rate”. Following that, Cleveland Fed President Loretta Mester said on Monday that if there is an error to be made, better that the Fed do too much than to do too little.

Against this backdrop, Wall Street closed in the red but the S&P 500 Futures print mild gains at the latest.

Moving on, today’s US CB Consumer Confidence for September and Durable Goods Orders for August will be crucial to watch for immediate directions. However, major attention will be given to the risk catalysts for clear guidance. Overall, the DXY will likely remain firmer unless the scheduled data prints a significant disappointment, which is less anticipated.

Also read: US Consumer Confidence Preview: Near-term relief or more risk aversion?

Technical analysis

Although the failure to cross the May 2002 high of 115.32 joins the overbought RSI conditions to consolidate the latest DXY moves, the bulls remain hopeful unless witnessing sustained trading below the 2001 bottom surrounding 111.30.