On Monday, the U.S. dollar weakened slightly, with the Dollar index down 0.25% to 104.24 as Treasury yields pulled back and Wall Street sentiment remained positive.

However, this retreat may be short-lived, as several factors on the economic calendar this week could trigger a bullish reversal in the foreign exchange (FX) space.

One key catalyst is the Federal Reserve’s semi-annual monetary policy report to Congress. Fed Chairman Jerome Powell is scheduled to speak on Tuesday and Wednesday, discussing recent economic developments and prospects for the future.

It is expected that Powell will take a hawkish stance, laying the groundwork for a higher peak rate in response to upside inflation risks.

While economic data from late 2022 suggested that price pressures were abating, recent reports have shown the opposite. Inflationary forces remain stubbornly strong, buoyed by resilient consumer spending and tight labor markets.

Several measures of price indices over different time horizons indicate that the central bank may not be able to achieve its 2% inflation target for the foreseeable future.

Powell’s testimony may open the door to bigger rate hikes, cementing calls for the Fed to raise borrowing costs by 50 basis points at its March meeting and pushing expectations for the terminal rate closer to 6.0%.

This scenario could be quite bullish for the U.S. dollar, signaling a shift in monetary policy that would likely support the currency.

Investors will be watching Powell’s remarks closely, as any indication of a more aggressive rate-hiking cycle could prompt a surge in demand for the U.S. dollar. While the current retreat may be a result of short-term market dynamics, the outlook for the currency could shift rapidly in response to the Fed’s policy decisions.

The U.S. dollar had a remarkable week, seeing an increase of around 0.65% to reach 103.63 over the past five days of trading.

This rise allowed the greenback to fully recover from the losses it faced in January, Investors King research showed.

The boost was mainly driven by a significant rise in Treasury yields across the board, fueled by expectations that the Fed will have to keep raising borrowing costs to fight against inflation.

The 2-year and 10-year bond yields hit their highest point in four weeks, as traders adjusted their monetary policy expectations due to the revised terminal rate of 5.17%, which was previously 4.92%. This change was indicated by the 2023 Fed futures contracts.

Strong employment data has shifted the perspective on Wall Street, causing traders to reevaluate their predictions for Federal Open Market Committee (FOMC) hikes, due to the American economy’s remarkable resilience and ability to handle further tightening. The January jobs report showed that U.S. employers added 517,000 jobs, nearly double the expected amount, which could lead to upward pressure on wages and household spending.

The latest inflation report from the U.S. Bureau of Labor Statistics, set to be released on Tuesday, will give a clearer picture of consumer prices. Both headline and core Consumer Price Index (CPI) are expected to have risen by 0.4% on a seasonally adjusted basis, which would reduce the annual rate to 6.3% and 5.5% respectively.

However, this improvement could disappoint expectations due to a sudden surge in gasoline prices, which rose by 4.4% at the start of the year, according to the American Automobile Association. If the CPI does not meet expectations, traders may revise their predictions for the terminal rate, leading to higher yields and further strengthening the U.S. dollar in the coming weeks.

From a technical analysis perspective, the U.S. dollar index appears to be approaching a crucial resistance level near 103.80/104.00 after its recent rebound. If this level is breached, the bulls may push the dollar higher towards 104.65 and 105.60. On the other hand, if prices are rejected, initial support can be found around the 103.00 handle, created by a long-term rising trendline.

The United States Dollar on Tuesday extended its decline against global counterparts as the uncertainty surrounding corporate earnings amid recession concerns dragged on currency outlook.

The U.S. Dollar Index, the gauge which measures the greenback’s strength against a basket of currencies, stood at 101.53, near an eight-month low of 101.51 hit on Monday.

Against the Sterling, the U.S. Dollar lost 0.12% to $1.2415 while the Euro gained 0.05% to $1.0920, nearing its 9-month high of $1.0927 attained on Monday.

“The euro does draw a lot of attention,” said Jarrod Kerr, chief economist at Kiwibank. The eurozone “had a favorable winter ….The energy crisis that people were expecting hasn’t quite played out yet.”

Meanwhile, the Canadian dollar was last exchanged at 1.3393 per dollar following the decision of the Bank of Canada to increase the interest rate to 4.5%.

Accordingly, the U.S. dollar lost 0.06% against the Australian dollar on Thursday morning after a 0.8% gain on Wednesday after the consumer price index report showed Australian inflation rose to a 33-year high in the fourth quarter of 2022.

A check by Investors King showed that against the New Zealand dollar, the U.S. dollar was steady at $0.6480. In Asia, the Japanese yen appreciated by 0.3% to 129.21 per dollar.

The currency traders have started pricing in a 25-basis point interest rate increase for next week when the Federal Open Market Committee (FOMC) will converge in a two-day meeting to decide the interest rate.

“There are now signs the U.S. economy may be slowing in a more meaningful manner,” said economists at Wells Fargo.

“With the Fed no longer leading the charge on interest rate hikes and U.S. economic trends set to worsen, we now believe the U.S. dollar has entered a period of cyclical depreciation against most foreign currencies.”