US Dollar retreats with possible peace talks between Russia and Ukraine fueling risk-on across markets

• The US Dollar trades weaker on Thursday against most major peers. 
• Traders gear up for the Producer Price Index (PPI) and weekly jobless claims due later in the day. 
• The US Dollar Index (DXY) drops below 108.00 and ekes out losses for this week. 

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, has fallen to 107.50 so far on Thursday. The knee-jerk reaction comes after stronger-than-expected US Consumer Price Index (CPI) data for January was released on Wednesday,  which pushed the US Dollar higher. However,  the turnaround came in the US trading session when United States (US) President Donald Trump and Russian President Vladimir Putin agreed over the phone to start peace talks with Ukraine. 

The economic calendar is focusing on US producer figures on Thursday. The January Producer Price Index (PPI) is due. The weekly US Jobless Claims will be released as well.  Traders meanwhile can further digest the two-day testimony from US Federal Reserve (Fed) Chairman Jerome Powell at Capitol Hill. 

Daily digest market movers: Some relief

• US President Trump issued a warning for Hamas and the Gaza region, demanding that Hamas releases all hostages by noon on Saturday or "all hell will break loose", Reuters reports. 
• The possibility of a start in peace talks between Russia and Ukraine is spurring risk assets and the Euro (EUR) against the US Dollar (USD). This, in turn, triggers a softer US Dollar Index. The Euro accounts for 57.6% of the weight in the DXY.
• At 13:30, nearly all important data for this Thursday will be released:
  • US Jobless Claims for the week ending on February 7 are expected to slide to 215,000, coming from 219,000 in the previous week. Continuing Claims ending January 31 should decline as well to 1.880 million, coming from the previous 1.886 million. 
  • The monthly headline PPI for January is expected to tick up to 0.3%, from 0.2%.
  • The monthly core PPI for January is expected to rise sharply to 0.3%, coming from 0% in December. 
• Equities are in a good mood. European indices outpace US futures, and all major indices and futures are trading in the green. 
• After the stronger-than-expected January CPI reading, the CME FedWatch tool shows a 64.3% chance that interest rates will remain unchanged at current levels in June, compared to 50.3% before the release. This suggests that the Fed would keep rates unchanged for longer to fight against persistent inflation. 
• The US 10-year yield is trading around 4.607%, a touch softer from this week's high of 4.657%.

US Dollar Index Technical Analysis: Wrong-footed

The US Dollar Index (DXY) is proving the thesis again that when all banks call for a specific direction or target level, the opposite will often materialize. At the start of this year, nearly all major banks predicted parity in EUR/USD as a given. With peace talks between Russia and Ukraine possibly underway and the tensions in Ukraine perhaps ending in 2025, a substantially weaker US Dollar might be a scenario only a few have kept as a possible outcome. 

On the upside, the first barrier at 109.30 (July 14, 2022, high) was briefly surpassed but did not hold last week. Once that level is reclaimed, the next level to hit before advancing further remains at 110.79 (September 7, 2022, high). 

On the downside,  107.35 (October 3, 2023, high) is still acting as strong support after several tests since late January. In case more downside occurs, look for 106.52 (April 16, 2024, high), 106.28  (100-day Simple Moving Average), or even 105.89 (resistance in June 2024) as better support levels. 

US Dollar Index: Daily Chart