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- US Dollar rally pauses as debt-ceiling talks are put on hold
US Dollar rally pauses as debt-ceiling talks are put on hold
- US Dollar in a mixed mode again with no real big moves noticeable in any major pair.
- US debt-ceiling talks in stalemate while CME Fed futures are at 50% for another hike in July.
- US Dollar Index holding on to marginal gains as a new two-month high is in reach.
The US Dollar (USD) has paused its advance against most currencies on Wednesday after cold water got poured on the debt ceiling talks. Both sides departed on Tuesday night with no agreement, no new date set for further talks and no comments from both parties while the 1st of June is approaching fast. Markets will look for further info from US Treasury Secretary Yellen who is due to 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 behaviour and discussion punts that have been put on the table in the last meeting in order to assess if another rate hike in July is plausible. From the looks of the strong 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 being dragged in the red as well with the negative 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 came at 55.1 vs 53.6 from 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) jump higher and are nearing the peak of last Wednesday.
- US equity futures are mildly in the red with the VIX still unchanged at 17.
- The CME Group FedWatch Tool shows that markets are pricing in a 50% chance of 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 both 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 contracts 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 change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 in order to assess any further downturn or upturn.
US Dollar FAQs
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the 'de facto' currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world's reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed's 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed's weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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