US Dollar Index: DXY Licks Its Wounds At a Five-Week Low Above 102.000 On Conflicting Fed And Macro Catalysts

The US Dollar Index (DXY) recovers recent losses to trade between 102.30 and 102.40 on a sluggish Monday morning in Asia. In doing so, the dollar's index against six main currencies explains the market's lack of interest due to the Juneteenth holiday. In addition to allowing the DXY to recover from its recent losses, strident Fed concerns may also be a factor. However, the muddled US data and relatively hawkish European Central Bank (ECB) actions give US Dollar bears reason for optimism.

In June, preliminary readings of the Consumer Sentiment Index (CSI) from the University of Michigan (UoM) improved, while US inflation expectations moderated and subdued US Dollar bulls. In spite of this, Fed policymakers have been hawkish as of late, allowing the DXY to consolidate recent losses despite a lethargic start to another crucial week. It is noteworthy that the US Dollar Index declined the most in the past week since early January.

According to the most recent US Federal Reserve (Fed) Monetary Policy Report to Congress, published on Friday, "Inflation in the US is well above target and the labour market remains very tight," According to Reuters, the report also stated, "The outlook for the federal funds rate is subject to considerable uncertainty."

Thomas Barkin, president of the Richmond Fed, stated, "Raising rates further could increase the risk of a more significant economic slowdown." The policymaker added, however, that the Fed can do more to stall the resilient US economy, which caused a rise in 2-year Treasury bond yields to 4.75 percent and helped the US Dollar recover from its lows. In addition to Fed's Barkin, Chicago Fed President Austan Goolsbee and Federal Reserve Governor Christopher Waller appeared somewhat hawkish, which helped the DXY recover from a multi-day low the day before.

Alternately, weaker-than-expected US inflation, Retail Sales, and the Fed's hawkish pause combine with risk-positive news from China to stimulate the DXY investors.

According to Reuters, US Secretary of State Antony Blinken and Chinese Foreign Minister Qin Gang held "frank and constructive" discussions over the weekend regarding their differences regarding Taiwan and trade. Reuters reported, however, that the diplomats appeared to concur on little besides continuing the conversation with an eventual meeting in Washington. In addition, news from the South China Morning Post (SCMP) citing the China State Council flashes favourable signals for sentiment, as it states, "The Council reviewed a series of macroeconomic policies designed to expand 'effective demand,' strengthen the real economy, and defuse key risks."

In this context, S&P500 Futures follow Wall Street's modest losses despite the absence of US stock and bond market participants on Monday, which can influence DXY movements going forward. Nonetheless, it will be crucial to monitor Fed Chairman Powell's semi-annual testimony and June PMIs for indications of distinct direction.