US Dollar Index looks to test 101.60 as odds of less-hawkish Fed bets soar

• The USD Index is expected to decline towards a seven-month fresh low at 101.60.
• Greater than 94% likelihood that the Federal Reserve will raise interest rates by 25 basis points, bringing the rate to a range of 4.50-4.75%.
• An expansion in the monthly Retail Sales might provide intermediate support to the USD Index.

The US Dollar Index (DXY) has sensed barricades whiling an attempt to sustain above the critical resistance of 101.80 in the Asian session. This has led to a fall in the USD Index, which is set to test the fresh seven-week low at 101.60. The USD index could remain lackluster on Monday as United States markets will remain closed because of Martin Luther King’s Birthday.

Investors’ risk appetite has improved as the Federal Reserve (Fed) is set to further slow down its policy-tightening pace. Positive market sentiment has infused strength in the S&P500 futures, which have continued their four-day winning streak further. The 10-year US Treasury yields scaled higher to 3.50%.

Bets for 25 bps interest rate hike in February soar

After observing a downtrend in the United States Consumer Price Index (CPI), thanks to the decline in gasoline and used car prices, the Fed is expected to trim the pace of its policy tightening further. Fed chair Jerome Powell slashed the extent of the interest rate hike to 50 basis points (bps) in December after four consecutive 75 bps rate hikes. As the inflation rate has trimmed further, the Fed might choose a smaller rate hike to achieve price stability.

As per the CME FedWatch tool, the chances of pushing interest rates to 4.50-4.75% by hiking interest rates with a 25 bps rate hike have scaled above 94%.

US PPI and Retail Sales data - key triggers ahead

This week, the US Producer Price Index (PPI) and Retail Sales data will remain in the spotlight. As per the consensus, a decline in headline factory gate prices of goods and services (Dec) is expected at 6.8% from the former release of 7.4%. Also, the core Producer Price Index might trim to 5.9% from the former release of 6.2% in a similar period. An occurrence of the same might bolster the Fed's case of a further 25 bps interest rate hike.

Apart from that, the monthly Retail Sales data (Dec) is expected to expand by 0.1% vs. the former contraction of 0.6%. A recovery in the retail demand led by the upbeat labor market could support the USD Index ahead.