USD/CNH retreats from yearly top past 7.0500 as China’s Xi promotes stable Central Asia, Fed’s Powell eyed

• USD/CNH marks yearly peak reversal while poking three-day uptrend.
• China President Xi endures friendship with Central Asian leaders, advocates for stable, wealthy region.
• US Dollar struggles to defend latest gains amid fresh challenges for debt ceiling deal, likely US-China tension.
• Cautious mood ahead of Fed Chair Powell’s speech also tease USD/CNH bears.

USD/CNH remains mildly bid at the highest levels in 2023 despite recent retreating from 7.0750 to 7.0500 amid early Friday morning in Europe. In doing so, the offshore Chinese Yuan (CNH) pair cheers the US Dollar’s retreat, as well as upbeat headlines from China, not to forget expectations of the People’s Bank of China’s (PBOC) intervention.

That said, China President Xi Jinping eyes stronger ties with Central Asian nations amid the Group of Seven (G7) nations’ dislike for  the Asian major’s links with Russia. “Central Asian heads of state converged in China's historic city of Xian on Thursday for one-on-ones with Chinese leader Xi Jinping to seal pledges of "enduring" friendship, paving the way for a summit expected to result in a regional pact with Beijing,” per Reuters.

On the other hand, the US Dollar Index (DXY) seesaws at the highest levels in two months amid the headlines suggesting the US House Freedom Caucus’s capacity to block any agreement to raise the $31.4 trillion debt ceiling. The same amplifies the US default woes. Also challenging the optimists is the US-Taiwan trade deal ahead of planned meetings between China's Commerce Minister Wang Wentao and USTR Tai and US Commerce Secretary Gina Raimondo.

It should be noted that a slump in the market’s bets on the US Federal Reserve (Fed) rate cut in 2023, as well as an increase in the odds of a 0.25% rate hike in June, joined firmer US data and hawkish Fed talks to previously propel the DXY. Additionally favoring the greenback bulls, as well as fueling the USD/CNH, were concerns that the US policymakers will be able to overcome the default fears.

The same propelled the offshore Chinese Yuan pair to the multiday- high and raised fears of the PBOC intervention, which in turn could be linked to the pair’s latest retreat.

Against this backdrop, , S&P500 Futures struggle to refresh the yearly top as it prints mild gains near 4,220 after rising to the highest levels since August 2022 the previous day. That said, the US 10-year and two-year Treasury bond yields also hesitate in extending the five-day uptrend at the monthly tops surrounding 3.64% and 4.25% in that order.

Looking forward, Federal Reserve (Fed) Chairman Jerome Powell’s speech and US debt ceiling negotiations will be the key for the traders to watch as US President Joe Biden said to have the decision to avoid a default by Sunday.

Technical analysis

A successful break of a five-month-old descending resistance line, now support around 6.9800, keeps the USD/CNH bulls hopeful.