The US Dollar (USD) has started to gather strength against its major rivals mid-week amid a negative shift witnessed in risk perception following Tuesday’s uninspiring performance. The US Dollar Index, which tracks the USD’s valuation against a basket of six major currencies, turned north early Wednesday and reached its highest level since mid-March, above 104.50.
The USD’s performance will likely continue to be impacted by risk perception in the second half of the day, with investors keeping a close eye on headlines surrounding the debt-limit bill.
On Tuesday, the House Rules Committee advanced the debt-ceiling bill to the House by an uncomfortably close vote of 7 to 6, causing investors to be cautious. Several Republican lawmakers voiced their opposition against the bill, which will be debated on the House floor and voted on Wednesday before moving to a final Senate vote.
Daily Digest Market Movers: US Dollar Rally Gathers Steam On Wednesday
- Reflecting the risk-averse market atmosphere, US stock index futures traded in negative territory on Wednesday.
- In an interview with the Financial Times, Cleveland Federal Reserve (Fed) Bank President Loretta Mester said she doesn’t necessarily see a compelling reason for pausing rate increases amid a “really embedded, stubborn inflationary pressure.”
- The benchmark 10-year US Treasury bond yield continued to push lower on Wednesday and was last seen losing more than 1% daily below 3.7%. Nevertheless, the CME Group FedWatch Tool shows that markets are pricing in a nearly 70% probability of the Fed raising its policy rate by 25 basis points (bps) in June.
- ON WEDNESDAY, the US Bureau of Labor Statistics will release the JOLTS Job Openings data for April. The ADP’s private sector employment report and the ISM’s Manufacturing PMI survey will be featured in the US economic docket on Thursday.
- Previewing the ADP data, “not only have ADP’s figures jumped from miss to beat and the other way around, but these differences have also been significant, especially in recent months,” said FXStreet Analyst Yohay Elam. “The upcoming May report could be weak after leaping to the highest level since July 2022 in the latest April publication.”
- US consumer sentiment weakened slightly in May, with the Conference Board’s (CB) Consumer Confidence Index edging lower to 102.3 from 103.7 in April (revised from 101.3). The Present Situation Index declined to 148.6 from 151.8, and the Consumer Expectations Index remained unchanged at 71.5. Finally, the one-year consumer inflation expectations dropped to 6.1% in May from 6.2% in April.
- House prices in the US rose by 0.6% monthly in March, the monthly data published by the US Federal Housing Finance Agency showed on Tuesday. This reading followed February’s increase of 0.7% (revised from 0.5%) and came in better than the market expectation of +0.2%.
- On Sunday, US President Joe Biden and Republican House Speaker Kevin McCarthy agreed to temporarily suspend the debt limit to avoid a US debt default. The House of Representatives and Senate still need to approve the deal, which will suspend the $31.4 trillion debt ceiling until January 1, 2025, in the coming days.
- The US Bureau of Economic Analysis (BEA) reported on Friday that inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, rose to 4.4% yearly in April from 4.2% in March.
- The Fed’s preferred inflation gauge, the annual Core PCE Price Index, increased to 4.6%, compared to the market expectation of 4.6%.
- Further details of the BEA’s publication showed that Personal Income increased 0.4% monthly while Personal Spending rose 0.8%.
Technical Analysis: US Dollar Index Turns Bullish Following Tuesday’s Decline
ON TUESDAY, the US Dollar Index (DXY) closed above the key technical level of 104.00 (Fibonacci 23.6% retracement of the November-February downtrend), reflecting buyers’ willingness to defend that support. In case the DXY starts using 104.50 (static level) as support, it could target 105.00 (psychological level, static level) and 105.60 (200-day SMA, Fibonacci 38.2% retracement) next.
On the downside, 104.00 stays intact as key support. A daily close below that level could attract USD sellers and open the door for an extended slide toward 103.00, where the 100-day Simple Moving Average (SMA) is located.
It’s also worth noting that the Relative Strength Index (RSI) indicator on the daily chart stays near 70, suggesting that the DXY could correct lower in the short term before the next leg is higher.
How Does Fed’s Policy Impact US Dollar?
The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) will likely gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.
The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth, and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.