US Dollar (DXY): Debt Ceiling Impasse, Powell’s Surprising Stance Weigh on Greenback

DXY Highlights

• US Dollar falls due to Powell’s dovish remarks, halted debt ceiling talks
• Dollar index drops, while Euro and Yen see mixed performance
• Short-term forecast for the US dollar is bearish considering recent events

DXY Overview

The US dollar fell against a basket of major currencies on Friday following remarks made by Federal Reserve Chair Jerome Powell, which surprised the market with a moderately dovish stance. Powell highlighted the tightening of credit conditions and suggested that the central bank might not need to raise interest rates as much as previously anticipated. This unexpected turn of events, coupled with a pause in negotiations to raise the US government’s debt ceiling, added pressure on the dollar.

In response to Powell’s remarks, the June US Dollar Index dropped by 0.4% to 103.08, after reaching seven-week highs in the previous session. Throughout the week, the dollar recorded a 0.6% gain. Meanwhile, the Euro saw a 0.3% increase to $1.0806, but experienced a weekly decline of 0.8%. Against the Yen, the dollar fell 0.7% to 137.76 yen, although it had previously reached a six-month high of 138.745. Overall, the dollar posted a 1.7% gain for the week, marking its largest weekly rise since mid-February. Finally, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $28.26, down $0.09 or -0.32%. 

Fed Chair Powell’s Remarks

Powell’s comments deviated from market expectations, as he neither displayed a hawkish nor overtly dovish stance. Instead, he emphasized the need for careful assessment of rate hikes’ impact on the economic outlook. This departure from expectations prompted the bond market and foreign exchange market to adjust their positions, disrupting the dollar’s upward momentum heading into the weekend.

Debt Ceiling Negotiations

Simultaneously, negotiations between US House of Representatives Republicans and Democratic President Joe Biden’s administration on raising the federal government’s $31.4 trillion debt ceiling have been paused. Representative Garret Graves, the lead Republican negotiator, expressed frustration with the lack of progress and stated that discussions would not continue until substantive conversations could be had. This development further undermined the dollar.

Short-term Forecast

Considering the recent events, the short-term forecast for the US dollar appears bearish. Powell’s unexpectedly dovish stance, the pause in debt ceiling negotiations, and the subsequent impact on the dollar’s momentum all contribute to this assessment. Additionally, ongoing concerns about persistently high inflation and the sputtering recovery of the Chinese economy, as evidenced by the yuan’s decline, further weaken the dollar’s outlook.

Technical Analysis

The main trend is up, but Friday’s price action suggests momentum may be getting ready to shift to the downside. The nearest resistance is 103.631 (R1). Overtaking this level will indicate the buying is getting stronger. This could fuel an acceleration into the next target at 104.406 (R2).

If the downside momentum increases on Monday then look for a near-term break into support at 102.405 (S1). Since the main trend is up, we could see a technical bounce on the first test of this level. If it fails then look for the selling to possibly extend into 101.797 (S2).