United States Dollar Index drifts lower amid softer bond yields; bullish bias intact

• DXY kicks off the new week on a weaker note amid the recent pullback in US bond yields.
• The Fed’s hawkish stance and geopolitical uncertainties support the safe-haven USD.
• The technical setup warrants caution for bearish traders and positioning for deeper losses.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, attracts fresh sellers at the start of a new week, sliding back closer to the 102.00 mark during the Asian session. The index, however, remains confined in a familiar range, warranting caution before positioning for any meaningful corrective fall from the highest level since April 2025, touched last week.

The recent minor pullback in US bond yields keeps US Dollar (USD) bulls on the defensive, though the US Federal Reserve's (Fed) hawkish tilt offers some support and warrants caution for bearish traders. In fact, Minutes of the September FOMC meeting, released last Wednesday, confirmed that policymakers still view inflation as the dominant threat to the economy and back the case for further policy tightening.

US data and FOMC minutes underscore lingering inflation risks

Analysts at Nordea highlight that, in the US, “the latest ISM services data point to a renewed pick-up in price pressures,” with “the prices index” rising “to its highest level since July 2022,” while “the employment index returned to expansion.” They add that “the September FOMC minutes also highlighted policymakers’ concerns that inflation could remain elevated, although views differed on the implications for future policy.”

According to the CME Group's FedWatch Tool, traders are still pricing in over an 85% chance that the US central bank will raise borrowing costs again in December. Adding to this, the US-Iran standoff could help limit deeper losses for the safe-haven Greenback. In the latest developments, Iran’s top security official declared Washington’s response to its proposal for reopening the strategic Strait of Hormuz insufficient.

Moreover, a deadly Houthi attack on Riyadh’s main airport drew a Saudi vow of retaliation on Saturday, as President Donald Trump raised the possibility of joining strikes on the group and resuming attacks on Iran. This keeps the geopolitical risk premium in play, making it prudent to wait for strong follow-through selling before confirming that the DXY has topped out and positioning for any corrective decline.

Traders might also opt to wait on the sidelines amid holiday-thinned trading volumes and ahead of this week's key data/event. The US inflation figures – the Producer Price Index (PPI) and the Consumer Price Index (CPI) – will be published on Wednesday and Thursday, respectively, while the Fed Chair Kevin Warsh is scheduled to speak at the annual meetings of the IMF and World Bank in Bangkok on Friday.

DXY 4-hour chart

Technical Analysis

The recent range-bound price action witnessed over the past week or so might still be categorized as a bullish consolidation phase against the backdrop of a strong rally from the September monthly swing low. The DXY, however, is showing more of a corrective drift than an impulsive decline, suggesting that any subsequent slide might continue to attract fresh buyers near the 101.80-101.70 horizontal resistance breakpoint. On the top side, bulls might await a breakout through the year-to-date high, around 102.55, before placing fresh bets and positioning for further upside.

(The technical analysis of this story was written with the help of an AI tool. Know more.)