US Dollar Index (DXY) Cautious Ahead of US Inflation Data

During Thursday’s Asian session, the US Dollar Index (DXY) hovers around 102.45, displaying a tentative stance following its first daily loss in three sessions. This index, which measures the Greenback’s performance against six major currencies, reflects the prevailing caution in the market as traders await the release of the United States inflation data for July, as indicated by the Consumer Price Index (CPI).

Today’s US inflation figures have gained heightened significance in light of the recent disappointment stemming from the Nonfarm Payrolls (NFP) report for the same month. Adding to this, the consecutive declines in MBA Mortgage Applications over the past weeks challenge the strength of the DXY bulls, particularly given the growing discussions about a potential shift in the Federal Reserve’s (Fed) policy. The CME Group FedWatch Tool underscores this sentiment, revealing an 86.0% probability that the Federal Reserve will put a hold on interest rate hikes in its upcoming September meeting.

Beyond Fed-related concerns, the declining yields on US Treasury bonds also signal economic apprehensions within the US, thereby putting pressure on the DXY. Specifically, the US 10-year Treasury bond yields have experienced a drop over the past two days, indicating the first weekly loss in four weeks, currently hovering around 4.01% as of press time.

Despite these factors, the DXY benefits from overarching economic uncertainties emanating from China, Europe, and the UK, as well as global credit rating agencies’ intensified scrutiny of banks. These factors contribute to a supportive environment for the US Dollar Index. Similar concerns extend to worries about deflation in China and skepticism regarding future policies of major central banks.

Late on Wednesday, US President Joe Biden signed a long-awaited bill that grants the US Treasury Department the authority to limit or restrict specific US investments in Chinese entities, as reported by Reuters.

Amidst these developments, Wall Street concluded with losses, US Treasury bond yields declined, while S&P 500 Futures displayed minor gains as of press time.

Looking ahead, close attention will be paid to the US CPI and Core CPI data for July. Given the prevailing dovish concerns surrounding the Fed, these figures could potentially extend the recent retreat of the DXY from its key resistance line. Market predictions suggest a rise in the headline CPI to 3.3% year-on-year compared to the previous 3.0%, while the Core CPI (CPI excluding Food & Energy) is expected to remain stable at 4.8%.