United States Dollar Index weakens ahead of critical US inflation reports

The US Dollar Index (DXY) is weakening for the fourth straight day, currently trading around 98.70 during Asian hours on Thursday. Investors are closely monitoring upcoming US Producer Price Index data on Thursday and Consumer Price Index data on Friday, as these inflation reports could offer insights into the Federal Reserve's (Fed) monetary policy outlook before its upcoming meeting.

After recent stronger-than-expected US jobs data, traders have taken positions anticipating an interest rate hike, with over 60% odds according to the CME FedWatch Tool. However, a majority of economists in a Reuters poll believe the Fed will maintain its interest rate steady at its September 15-16 meeting and throughout the rest of the year, again contradicting market expectations for multiple rate hikes.

Strong economic data have been released in recent weeks, and many economists believe the August Consumer Price Index data will be key in finalizing their predictions for future interest rates. Strategists at BNY note that investor risk appetite has decreased, with iFlow Mood narrowing faster as investors reduce core sovereign bond exposure more aggressively than global equities.

The pullback is driven by rising global yields, prompting a more significant withdrawal from core sovereign debt compared to stock markets. The daily chart shows the Dollar Index Spot trading at 98.70, maintaining a bearish short-term outlook as it stays below the nine-day and 50-day Exponential Moving Averages (EMAs). The 14-day Relative Strength Index (14) at about 37 remains in bearish territory, indicating continued downside pressure despite some stabilization in the FXS Fed Sentiment Index around 125.72.

The nearest resistance is the nine-day EMA, with a significant barrier at the 50-day EMA, outlining the range the index must reclaim to alleviate the current bearish sentiment. In the absence of clear technical support, traders may focus on recent lows and psychological round numbers below 98.75 for potential demand zones, while any recovery attempts will likely face challenges as long as price remains under the clustered EMAs.