DXY inter-markets: looking to resume the upside

The upbeat momentum around the buck seems to have returned at the end of the week, pushing the USD Index to fresh highs in the mid-96.00s and once again opening the door for a potential test of earlier tops in the 96.80 band (June 27/July 11).

Better-than-expected results from US Retail Sales and Industrial Production plus inflation figures pretty much in line with consensus have given a dose of optimism to USD-bulls and lifted the index back to the positive ground for the second week in a row so far.

Yields in US money markets are sharply higher following the upbeat releases, collaborating with the dollar’s spike and adding to the likeliness of further resilience, if not a continuation of the up trend, in the upcoming weeks.

Posing a risk to the potential extension of the USD momentum, risk appetite trends emerge as the main hurdle. Volatility tracked by VIX remains depressed, showing the preference for riskier assets as well, although the impact on the dollar seems to have been less than expected during this week’s dominance of the risk-on sentiment.

Fed Fund futures remain on the downside today. However, an according to CME Group’s FedWatch tool, the probability of a 25 bp rate hike by the Fed has suddenly climbed to 12% in September and October (from nil last week) and stays above 33% for December.

That said, and in a context where the BoE has practically confirmed further easing in August, a cautious/’wait-and-see’ stance from the ECB and prospects of extra stimulus by the BoJ, a resumption of the up trend in the greenback seems likely in the coming months.

Next relevant levels in DXY remain the 96.80 area. Once cleared, there is not much in terms of significant resistance levels until March’s peaks in the mid-98.00s.