USD Index rebounds from recent lows and retests 110.50 ahead of data\

The index reverses the recent pullback and advances to 110.50.

US yields attempt a mild recovery across the curve.

ADP Report, ISM Non-Manufacturing take centre stage in the docket.

The greenback regains the smile following the recent sharp decline and retakes the 110.50 region when gauged by the USD Index (DXY) on Wednesday.

USD Index now looks to data

The index picks up some pace and partially reverses two consecutive daily drops amidst some loss of momentum in the risk complex in light of the recent needle-like rebound, particularly in the euro and the British pound.

The recovery in the buck so far comes in tandem with a tepid bullish attempt in US yields across after two consecutive sessions closing with gains, especially in the short end and the belly of the curve.

Interesting calendar in the US later on Wednesday will see the usual weekly MBA Mortgage Applications due in the first turn seconded by the ADP Employment Change Report for the month of September, Balance of Trade results, final S&P Global Services PMI and the ISM Non-Manufacturing.

In addition, Atlanta Fed R.Bostic (2024 voter, hawk) is also due to speak.

What to look for around USD

A hint of a recovery seems to have emerged around the dollar midweek after some decent support appears to have turned up near the 110.00 neighbourhood.

While the near-term outlook for the dollar looks somewhat dented, the firmer conviction of the Federal Reserve to keep hiking rates until inflation looks well under control regardless of a likely slowdown in the economic activity and some loss of momentum in the labour market continues to prop up the underlying positive tone in the index.

Looking at the more macro scenario, the greenback also appears bolstered by the Fed’s divergence vs. most of its G10 peers in combination with bouts of geopolitical effervescence and occasional re-emergence of risk aversion.

Key events in the US this week: MBA Mortgage Applications, ADP Employment Change, Balance of Trade, Final Services PMI, ISM Non-Manufacturing (Wednesday) – Initial Jobless Claims (Thursday) – Nonfarm Payrolls, Unemployment Rate, Consumer Credit Change, Wholesale Inventories (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Prospects for further rate hikes by the Federal Reserve vs. speculation of a recession in the next months. Geopolitical effervescence vs. Russia and China. US-China persistent trade conflict.

USD Index relevant levels

Now, the index is gaining 0.28% at 110.51 and faces the next up barrier at 114.76 (2022 high September 28) seconded by 115.00 (round level) and then 115.32 (May 2002 high). On the other hand, a breach of 110.05 (weekly low October 4) would open the door to 109.35 (weekly low September 20) and finally 107.68 (monthly low September 13).

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US: Weekly Initial Jobless Claims decline to 243K vs. 253K expected

Initial Jobless Claims fell by 2,000 in the week ending August 20.

US Dollar Index trades flat on the day above 108.50.

There were 243,000 initial jobless claims in the week ending August 20, the weekly data published by the US Department of Labor (DOL) showed on Thursday. This print followed the previous week's print of 245,000 (revised from 252,000) and came in better than the market expectation of 253,000.

Further details of the publication revealed that the advance seasonally adjusted insured unemployment rate was 1% and the 4-week moving average was 247,000, an increase of 1,500 from the previous week's unrevised average.

"The advance number for seasonally adjusted insured unemployment during the week ending August 13 was 1,415,000, a decrease of 19,000 from the previous week's revised level," the DOL further announced.

Market reaction

The US Dollar Index edged higher after this data and was last seen trading virtually unchanged on the day at 108.56.

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 Dollar slides as mixed U.S. data highlights uncertain path

The dollar dropped to a three-week low in choppy trading on Friday, as investor concerns about recession outweighed inflation worries, for now, amid a mixed batch of economic data.

There was also a lot of month-end position-squaring, analysts said.

Earlier, U.S. economic numbers showed that inflation continued its red-hot rise in June, keeping the Federal Reserve on track to raise interest rates as aggressively as it deems necessary.

The personal consumption expenditures (PCE) price index jumped 1.0% last month, the largest increase since September 2005 and followed a 0.6% gain in May. In the 12 months through June, the PCE price index advanced 6.8%, the biggest gain since January 1982.

Excluding the volatile food and energy components, the PCE price index shot up 0.6% after climbing 0.3% in May.

The dollar initially rose on the inflation numbers, but gains fizzled amid the final University of Michigan report showing consumers' inflation expectations slipped in July.

Federal Reserve Chairman Jerome Powell had mentioned the Michigan survey last month as key behind the pivot to the more aggressive rate posture.

The greenback was also partly weighed down by data showing the Chicago manufacturing index falling to a 23-month low of 52.1 from a prior low of 56.0, according to Action Economics.

In afternoon trading, the dollar index, a measure of its value against six major currencies, slid 0.3% to 105.89. Earlier, it slid to a three-week trough of 105.53.

"Traders are engaging in some quarter-end position-squaring, preparing for a period in which inflation and growth rates subside, tilting interest differentials against the dollar," said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.

"Next week's (U.S.) jobs report looms as a potential volatility catalyst, and no one wants to be caught offside if job creation slows more than expected," Schamotta added.

Another key indicator, the U.S. employment cost index (ECI), also increased. The ECI, the broadest measure of labor costs, rose 1.3% last quarter after accelerating 1.4% in the January-March period, the Labor Department said on Friday.

The index is widely viewed as one of the better gauges of labor market slack and a predictor of core inflation.

Action Economics, in its blog after the U.S. data, said the ECI was one of the metrics that alarmed the Fed and caused its pivot to a 75 basis points hike.

Post-data on Friday, rates futures markets have priced in a 72% chance of a 50 basis points hike at the Fed's September policy meeting, with a 28% probability of a 75-bps rate increase. .

The rates markets also predict that the fed funds rate will peak in February 2023. Pre-U.S. data, futures were betting that top in the fed funds rate would hit this December.

The euro rose 0.2% versus the dollar to $1.0213.

Against the yen, the dollar slid 0.7% to 133.42 yen. The greenback also posted its largest monthly percentage fall since July 2020.

The yen was the primary short bet of the widening interest rate differential trade between the United States and its global peers, with net shorts on the currency, despite a recent pullback, above historical averages at $5.4 billion.

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US dollar to weaken over short-term on a 50 bps hike from the Fed – Nordea

Economists at Nordea believe the Federal Reserve will hike by 50 bps, but uncertainty is very high. If they are right, the USD could weaken in favour of other G10 currencies.

USD could strengthen on a 75 bps hike from the Fed 

“We believe the Fed will hike by 50 bps this week but we admit that the uncertainty is very high. If we are right, we will likely see the USD weaken again in favour of other G10 currencies such as EUR, NOK, SEK, DKK, etc over the short-term. 

“If we are wrong, the USD could strengthen somewhat more against the rest of G10 currencies.”

“From a technical standpoint, the USD is close to being overbought against most G10 currencies currently.”

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EUR/USD Price Analysis: Extra pullbacks seen below 1.080

EUR/USD fades the pre-ECB uptick to the 1.0920 zone on Thursday.

Recent lows around 1.0800 emerge as the next contention area.

In light of the ongoing price action, extra losses in the pair remain in the pipeline in the short-term horizon. Against that, a break below the so far monthly low at 1.0808 (April 14 should pave the way for a quick visit to the 2022 low at 1.0805 (March 7) before the May 2020 low at 1.0766 (May 7).

While below the 200-day SMA, today at 1.1440, the outlook for the pair is expected to remain negative. 

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