USD Index struggles around 103.60 amidst debt ceiling optimism, looks at Fed

• The index advances further and flirts with tops near 103.60.
• Optimism around a potential debt ceiling deal remains in place.
• Fedspeak, Chief Powell take centre stage across the pond on Friday.

The greenback, when tracked by the USD Index (DXY), maintains the bid bias well and sound in the 103.60 region at the end of the week.

USD Index now looks at Fed speakers, Powell

The index navigates its fourth consecutive sessions with gains on Friday, although it seems to have met some decent resistance around the 103.60/65 band, an area last visited back in mid-March.

In the meantime, investors’ focus of attention remains on the potential bipartisan deal around the debt ceiling issue, which could materialize at some point in the next few days according to latest news.

Furthermore, recent strong results from US fundamentals – particularly the weekly labour data – lent oxygen to the idea that the Fed might raise rates in June instead of pausing its tightening cycle. On this, Dallas Fed L. Logan said on Thursday that recent data does not justify an impasse, while CME Group’s FedWatch Tool sees the probability of another 25 bps rate hike at around 37% from nearly 15% a week ago.

Absent releases in the US data space, market participants are expected to closely follow comments from NY Fed J. Williams (permanent voter, centrist) and FOMC Governor M. Bowman (permanent voter, centrist). In addition, Chair J. Powell will participate in a discussion panel with former Fed Chief B. Bernanke.

What to look for around USD

The index looks to extend further the weekly improvement to multi-week highs well past the 103.00 hurdle on Friday.

The index manages well to leave behind the recent multi-week consolidation theme, setting aside at the same time initial weakness following the recent indication that the Fed will probably pause its normalization process in the near future. That said, the future direction of monetary policy will be determined by the performance of key fundamentals (employment and prices mainly).

Favouring a pause by the Fed appears the persevering disinflation – despite consumer prices remain well above the target – incipient cracks in the labour market, the loss of momentum in the economy and persevering uncertainty surrounding the US banking sector.

Key events in the US this week: Fed J. Powel (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 20223. Fed’s pivot. Geopolitical effervescence vs. Russia and China. US-China trade conflict.

USD Index relevant levels

Now, the index is up 0.02% at 103.53 and the break above 103.62 (monthly high May 18) could open the door to 105.78 (200-day SMA) and then 105.88 (2023 high March 8). On the downside, the next support emerges at 101.01 (weekly low April 26) prior to 100.78 (2023 low April 14) and finally 100.00 (psychological level).