US Dollar Index (DXY) struggles below 99.00, two-week low as traders eye US inflation data

• DXY drifts lower for the second straight day – also marking the fourth day of a fall in the previous five.
• USD bulls continue to trim long positions amid the rallying JPY and ahead of the key US inflation data.
• Rising Fed hike bets and escalating US-Iran tensions could lend support to the safe-haven Greenback.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, remains under some selling pressure for the second straight day and drops to an over two-week low during the Asian session on Tuesday. The index currently trades around the 98.80 region, down 0.10% for the day, though it manages to hold above a three-month trough, touched in August, as traders await this week’s US inflation figures.

The US Producer Price Index (PPI) and the Consumer Price Index (CPI) will be published on Thursday and Friday, respectively. The crucial data will be looked at for more cues about the US Federal Reserve’s (Fed) policy path, which, in turn, would play a key role in determining the near-term trajectory for the US Dollar (USD). In the meantime, a surging Japanese Yen (JPY) is seen adding significant momentum to the recent pullback in the DXY from a nearly three-week high, touched last Wednesday.

Meanwhile, the better-than-expected US Nonfarm Payrolls (NFP) report, released last Friday, increased the chances of a Fed rate hike at the September 15-16 meeting amid inflation risks stemming from elevated energy prices.  In fact, crude oil prices sit near July 24 highs amid heightened fears of prolonged disruptions to supplies on the back of US-Iran confrontations around the Strait of Hormuz. This keeps the geopolitical risk premium in play and could support the safe-haven Greenback.

USD support seen as markets await key US CPI

Analysts at OCBC describe the latest US payrolls report as “supportive of the USD at the margin, but not sufficient on its own to drive a sustained leg higher.” They argue that the stronger jobs data “reinforces the resilience of the US economy and should keep the risk of Fed tightening alive, which in turn may restrain USD downside.” However, with “wage pressures still contained,” OCBC expects that markets will “require firmer inflation evidence before pricing a Sept hike with greater conviction.” In this context, they note that “focus therefore shifts to this week’s CPI, where an upside surprise could provide the catalyst for renewed USD strength, while a softer print would likely keep price action more two-way.”

DXY daily chart

Technical Analysis

The DXY maintains a bearish near-term tone beneath the 200-day Exponential Moving Average (EMA) at 99.52 and the key Fibonacci retracement band above 99.00. The loss of the 61.8% retracement at 99.23 leaves the index capped by a dense overhead cluster, suggesting rallies are likely to face supply while price remains lodged below these medium-term resistance levels.

Immediate resistance is seen at the 61.8% Fibo. retracement at 99.23, followed by the 200-day EMA at 99.52 and the 50.0% retracement near 99.72, with higher hurdles at the 38.2% level around 100.20 and the 23.6% retracement at 100.80. On the downside, initial support emerges at the 78.6% Fibo. retracement at 98.55, ahead of a lower structural floor around 97.67, where buyers may attempt to stabilize the decline.

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