US Dollar Index moves above 109.00, upside potential seems limited due to dovish Fed

• The US Dollar Index could struggle due to the increased likelihood of the Fed lowering interest rates twice this year.
• US Retail Sales rose by 0.4% MoM in December, falling short of the market expectations of a 0.6% rise.
• US Treasury yields are expected to see a weekly decline of over 3%.

The US Dollar Index (DXY), which tracks the US Dollar’s (USD) performance against six major currencies, halts its four-day losing streak, trading near 109.10 during the Asian hours on Friday. However, the Greenback encountered difficulties as weaker US Retail Sales and persistent inflation data bolstered market expectations that the Fed will reduce interest rates twice this year.

US Retail Sales rose by 0.4% MoM in December, reaching $729.2 billion. This reading was weaker than the market expectations of a 0.6% rise and lower than the previous reading of a 0.8% increase (revised from 0.7%).

US core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose by 3.2% year-over-year (YoY) in December, slightly below both the previous month's 3.3% increase and market forecasts of 3.3%. Monthly, the core CPI grew by 0.2%, compared to a 0.3% rise in the prior month.

The increasing dovish sentiment surrounding the Fed led to a drop in US Treasury bond yields, with the 2-year and 10-year notes now at 4.23% and 4.60%, respectively. Both yields are set to experience a weekly decline of more than 3%.

Chicago Federal Reserve Bank President Austan Goolsbee stated on Thursday that he has grown increasingly confident over the past several months that the job market is stabilizing at a level resembling full employment, rather than deteriorating into something worse, according to Reuters.