DXY traces yields to refresh multi-day top below 103.00 ahead of US ISM Services PMI

• US Dollar Index rises to three-week high as risk aversion joins upbeat Treasury bond yields.
• Fitch Ratings’ US credit rating downgrade fans risk aversion and bolster US Dollar’s haven demand.
• US Treasury Department’s readiness for testing bond demand propels yields, especially amid sour sentiment.
• Upbeat US ADP Employment Change also favors DXY bulls ahead of multiple key statistics.

US Dollar Index (DXY) bulls take a breather at the highest levels in three weeks, making rounds 102.60-70 during early Thursday in Asia. In doing so, the Greenback’s gauge versus the six major currencies defend the previous three-day uptrend ahead of a slew of US data conveying employment, inflation and activity conditions.

DXY cheered risk-off mood and benefited from the strong US Treasury bond yields on Wednesday. Also likely to have favored the US Dollar Index bulls were the strong US ADP Employment Change numbers for July.

That said, Fitch Ratings’ downgrade to the US government credit rating flagged fears of the US default and weighed on the sentiment, which in turn bolstered the US Dollar’s haven demand. Further, US ADP Employment Change for July rose past 189K markets forecasts to 324K while the previous readings were revised down to 455K, which in turn added strength to the DXY.

Furthermore, the US Treasury Department raised possibilities of testing demand for the US bonds after the rating cut by fueling the weekly longer-term debt issuance, which in turn propelled the bond coupons and the DXY.

It’s worth noting, however, that US Treasury Secretary Janet Yellen and White House (WH) Economic Adviser Jared Bernstein defended the credibility of the US Treasury bonds during late Wednesday. The policymakers also vouched for the US economic strength after Fitch Ratings’ cited such concerns as the catalysts for their downgrade to the US government credit ratings.

Against this backdrop, US 10-year Treasury bond yields rose to the highest level since November 2022 whereas the Wall Street benchmarks also closed in the red. That said, the S&P500 Futures remain sidelined at two-week low after declining in the last two consecutive days.

Looking forward, the US Dollar Index may witness a lack of bullish momentum during the Asian and European session amid a cautious mood ahead of the top-tier US data. However, the sour sentiment and the previous day’s technical breakout keeps the DXY buyers hopeful with eyes on the US ISM Services PMI, Factory Orders, Weekly Initial Jobless Claims and quarterly readings of Nonfarm Productivity and Unit Labor Costs.

It should be noted that the market players have been bullish on the US Dollar and push the Greenback further toward the north should the scheduled data arrive as positive. That said, the latest Reuters poll of around 40 FX Strategists concluded that the USD will hold its ground against most major currencies over the coming three months as a resilient domestic economy bolsters expectations interest rates will remain higher for longer.

Technical analysis

Although a daily closing beyond the 100-DMA resistance-turned-support of 102.35 favors the US Dollar Index (DXY) bulls, a downward-sloping resistance line from May 31, near 102.75 at the latest prods the quote’s further upside.