US Dollar Index: Range holds as markets await Warsh and CPI – DBS

DBS Group Research economist Philip Wee notes that the US Dollar Index (DXY) Index has been confined between 100.5 and 102 for three weeks as traders await clarity on whether the Federal Reserve (Fed) will proceed with a potential rate hike later this year. He highlights upcoming congressional hearings for Fed Chairman Kevin Warsh and June US CPI data as key catalysts for a potential breakout in DXY.

Dollar index trapped in tight range

"The DXY Index has been trapped between 100.5 and 102 for three weeks, awaiting more clarity on whether the Fed will proceed with the potential rate hike it flagged at the June FOMC meeting later this year."

"Fed Chairman Kevin Warsh’s congressional hearings are shaping up as a clash between the Fed’s new operating philosophy and Congress’s mandate for oversight."

"At the June 16-17 FOMC meeting, Warsh pivoted away from forward guidance by radically shortening the FOMC statement, stripping out the Committee’s previous easing bias and language detailing the balance of risks."

"Warsh has assembled five external task forces to overhaul Fed operations, which lawmakers, especially Democrats, worry may make the Fed less accountable to Congress and American voters."

"Hence, markets will focus on Warsh’s reaction to the June CPI data on July 14. Headline inflation is widely expected to decline by 0.1% MoM in June, contrasting sharply from May’s 0.5% rise, due to the plunge in oil prices back to pre-war levels."

"However, the real test will likely be core inflation, which is expected to remain sticky and unchanged at the same 0.2% MoM (2.9% YoY) level as the previous month."