The USD Index Recedes from Its Recent Highs and Passes 104.00 Ahead of the Latest Economic Data

The dollar index firmed up above 104 on Wednesday, holding near its highest levels in six weeks as stronger-than-expected US economic data and hawkish remarks from Federal Reserve officials buoyed the currency. Latest data pointed to still elevated inflationary pressures and a robust jobs market in the US, supporting the case for further monetary tightening.

Analyzing the data for the USD Index

In the wake of Wednesday's bullish attempt to level just beyond the 104.00 hurdles, the index remains within the current consolidative theme.

Due to the firmer-than-expected results from US fundamentals as well as the unabated hawkish narrative presented by Fed speakers, the dollar has regained traction. The recent bid bias in the dollar appears to be a result of speculation of a higher terminal rate and a tighter-for-longer Fed stance, which appears to be the cause of the recent higher terminal rate speculation.

This will be an interesting session data-wise in the US, as usual, Initial Claims will be released first, followed by Producer Prices, Building Permits, Housing Starts, and the Philly Fed Manufacturing Index.

The Cleveland Fed's L.Mester (2024 voter, hawk), the St. Louis Fed's J.Bullard (2025 voter, hawk), and the FOMC Governor's L.Cook (permanent voter, centrist) will all speak later in the NA session.

What to look for around USD

In the context of the persistent range-bound mood and ahead of further key US results in the coming week, the dollar remains within a consolidation phase near the 104.00 level.

There is a likelihood that the Fed's normalization process narrative will pivot or fail, as well as Fed speakers' hawkish messages, to remain at the forefront of the debate. As a result of US inflation figures for the month of January, consumer prices are still elevated, the labor market remains tight, and the economy continues to be resilient.

The loss of traction in wage inflation - as per the latest US jobs report -, however, seems to support the idea that the Fed's tightening cycle is starting to have an impact on the still robust US labor market.

Key events in the US this week:

Permits for Buildings, Housing Starts, Initial Jobless Claims, Philly Fed Index (Thursday), and the CB Leading Index (Friday).

The following issues are currently on the back burner:Growing conviction of a soft landing of the US economy. Fed's pivot. Geopolitical effervescence against Russia and China. US-China trade conflict. Slower interest rate hikes by the Fed versus shrinking odds of a recession in the next few months.

USD Index relevant levels

Now, the index is retreating 0.07% at 103.73 and should it breach 100.82 (2023 low February 2), the index will be able to reach 100.00 (psychological level) as well as 99.81 (weekly low April 21, 2021). The next-up barrier, however, is 104.11 (monthly high February 15), followed by 105.63 (2023 high January 6), and finally 106.44 (200-day SMA).

The United States Dollar Index measures the performance of the dollar against a basket of other currencies including EUR, JPY, GBP, CAD, CHF and SEK. The EUR is, by far, the largest component of the index, making up 57.6% of the basket followed by JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).