USD Index retreats from recent peaks near 104.30 ahead of PCE

• The index gives away some loses following recent peaks.
• Policy makers move closer to a deal in the debt ceiling.
• US inflation tracked by the PCE takes centre stage later on Friday.

The USD Index (DXY), which measures the greenback vs. a basket of its main rival currencies, recedes from recent multi-week peaks near the 104.30 region.

USD Index focuses on PCE, debt ceiling talks

The index has so far traded on the defensive for the first time this week, coming under some selling pressure after hitting new multi-week tops around 104.30 on May 25.

Following recent meetings, debt ceiling negotiators appear to have opened the door to a potential agreement that includes raising the debt limit and setting a two-year spending cap for the federal government.

In the meantime, investors’ attention will exclusively be on the release of April’s inflation figures measured by the PCE/Core PCE along with Personal Income/Spending, Durable Goods Orders, Trade Balance and the final Michigan Consumer Sentiment for the month of May.

What to look for around USD

The index now faces some downside pressure after the rally seems to have met initial resistance around 104.30 so far this week.

In the meantime, diminishing bets that the Fed will probably pause its normalization process in June appear underpinned by the steady resilience of key US fundamentals (employment and prices mainly) amidst the ongoing rally in US yields and the DXY.

Favouring a pause by the Fed, instead, appears the extra tightening of credit conditions in response to uncertainty surrounding the US banking sector.

Key events in the US this week: PCE/Core PCE, Durable Goods Orders, Flash Goods Trade Balance, Personal Income/Spending, Final Michigan Consumer Sentiment (Friday).

Eminent issues on the back boiler: Persistent debate over a soft/hard landing of the US economy. Terminal Interest rate near the peak vs. speculation of rate cuts in late 2023/early 2024. Fed’s pivot. Geopolitical effervescence vs. Russia and China. US-China trade conflict.

USD Index relevant levels

Now, the index is down 0.13% at 104.07 and faces the next support at the 100-day SMA at 102.85 seconded by the 55-day SMA at 102.43 and finally 101.01 (weekly low April 26). On the flip side, the surpass of 104.31 (monthly high May 25) seconded by 105.69 (200-day SMA) and then 105.88 (2023 high March 8).