US Dollar Rally Pauses As Debt-Ceiling Talks Are Put On Hold

The US Dollar (USD) paused its advance against most currencies on Wednesday after cold water poured on the debt ceiling talks. Both sides departed on Tuesday night with no agreement, no new date set for further discussions, and no comments from both parties while the 1st of June is approaching fast. Markets will seek additional info from US Treasury Secretary Yellen, who will speak at 14:00 GMT. 

On the macroeconomic data front, some fireworks are expected in the US session with Fed’s Waller due to speak and the FOMC Minutes from the latest meeting to be released at 18:00 GMT. Traders will want to see the voting behavior and discussion punts put on the table in the last session to assess if another rate hike in July is plausible. From the looks of the substantial S&P Global Services PMI numbers released on Tuesday, one more rate hike looks possible. 

Daily Digest: US Dollar Looking For Clues In The FOMC Minutes

  • Talks about the US debt ceiling are now officially in gridlock, with no future date set for further negotiations and no comments from both sides when the meeting ended on Tuesday evening.
  • US equities did not react well, breaking down the positive tone, and headed lower. 
  • All Asian and European equities are also being dragged in the red with the pessimistic mood out of the United States. 
  • On Tuesday, Richmond Fed Manufacturing Index contracted to -15 from -10. Business Conditions bounced a little to -17, coming from -27. 
  • US S&P Global May Flash Services PMI was 55.1 vs. 53.6 in April. The Flash Composite PMI printed 54.5 vs. 53.4 in April, and the Flash Manufacturing PMI came at 48.5 vs 50.2 in April.
  • US Credit Default Swaps (CDS) jumped higher and are nearing the peak of last Wednesday.
  • US equity futures are mildly red, with the VIX still unchanged at 17. 
  • The CME Group FedWatch Tool shows that markets are pricing in a 50% chance of a rate hike for July after hawkish comments from Federal Reserve officials Jim Bullard and Neal Kashkari. Rate cuts have moved down the line to as early as November 2023. The FOMC Minutes later this Wednesday could lock in the rate hike for the next meeting.
  • The benchmark 10-year US Treasury bond yield trades at 3.70% and eases a little bit in yield as US and German bonds jump higher. 

US Dollar Index Technical Analysis: Hiccup In Washington Pauses Uptrend

The US Dollar Index (DXY) has taken out the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.45 and 102.85 on the upside. A new high got printed briefly for the past two months but contracted a touch on Wednesday with the impasse in Washington on the talks to sort out the debt ceiling. 

On the upside, 105.75 (200-day SMA) still acts as the price target to hit, as the next upside key level at 104.00 (psychological, static level) acts as an intermediary element to cross the open space.

On the downside, 102.85 (100-day SMA) aligns as the first support level to confirm a trend change. If that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 to assess any further downturn or upturn.

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