US Dollar seems vulnerable amid sliding US bond yields, focus remains on US macro data

• The USD Index (DXY) drifts lower for the second straight day amid sliding US bond yields.
• The Fed’s higher-for-longer rates narrative should help limit any meaningful downside.
• Bears might also refrain from placing aggressive bets ahead of this week’s US macro data.

The US Dollar (USD) trades with a mild negative bias during the Asian session on Tuesday and remains well within the striking distance of its lowest level since February 2 touched last week. Meanwhile, the USD Index (DXY), which tracks the Greenback against a basket of currencies, manages to hold above mid-103.00s as traders await key US macro data for cues about the Federal Reserve's (Fed) future policy decisions.

Tuesday's US economic docket features the release of Durable Goods Orders, the Conference Board's Consumer Confidence Index and the Richmond Manufacturing Index. This will be followed by the prelim US Q4 GDP print on Wednesday and the crucial US Personal Consumption Expenditures (PCE) Price Index on Thursday. This could provide fresh signals about the likely timing of when the Fed may begin cutting interest rates and help determine the next leg of a directional move for the USD.

In the meantime, a fresh leg down in the US Treasury bond yields keeps the USD bulls on the defensive for the second straight day, though hawkish Fed expectations continue to act as a tailwind. Investors scaled back their expectations for a more aggressive policy easing by the Fed after the incoming US macro data pointed to sticky inflation and a still resilient economy. Adding to this, the FOMC meeting minutes released last week, along with comments by several Fed officials, reaffirmed bets that the US central bank will keep interest rates higher for longer. This, in turn, favours the USD bulls.

Even from a technical perspective, the DXY last week showed some resilience below the very important 200-day Simple Moving Average (SMA). This, in turn, makes it prudent to wait for strong follow-through selling before confirming that the USD has topped out in the near term and positioning for an extension of the recent pullback from a three-month peak touched earlier this February.