The US dollar index is attempting a modest recovery from the YTD low, upside potential appears limited

• The DXY is pulling away from the YTD low set on Wednesday, although it lacks bullish conviction.
• A modest rise in US Treasury yields provides some support for the Greenback.
• Increasing odds for a bigger Fed rate cut in September should limit any significant upside.

The US dollar (USD) is rising during the Asian session on Thursday and so far appears to have snapped a four-day losing streak at a fresh YTD low hit the previous day. The rise, however, lacks bullish conviction, with the USD Index (DXY), which tracks the greenback against a basket of currencies, trading with gains of less than 0.10% on the day around the 101.25 region.

A modest rebound in US Treasury bond yields is seen as a key factor lending some support to the dollar, although any further appreciation appears elusive amid subdued Federal Reserve (Fed) expectations. The preliminary annual analysis of employment data released by the US Bureau of Labor Statistics showed that US employers added 818,000 fewer jobs than reported in the year to March. This suggests that the US labor market is not as strong as expected and supports the outlook for more aggressive policy easing by the Fed.

Additionally, the minutes of the July 30-31 FOMC meeting revealed that the vast majority of officials supported the case for a rate cut in September, while some policymakers were leaning toward immediate action. Investors have been quick to react and are now pricing in a 38% probability of a 50 basis point (bps) rate cut in September, up from 29% a day earlier. Moreover, markets expect the Fed to announce about 100 bps of easing by the end of this year, which in turn should limit US bond yields and prevent aggressive bets on USD bulls.

Going forward, traders are now looking to Thursday’s US economic file – which includes the usual release of weekly data on initial jobless claims and existing home sales – for a boost later in the early North American session. However, the focus will remain on Fed Chairman Jerome Powell’s speech at the Jackson Hole Symposium on Friday. Investors will be scrutinizing Powell’s remarks to see if the significantly weaker labor market report warrants a bigger interest rate cut in September, which in turn will influence near-term USD price dynamics.