US Dollar (DXY): Rate Hike Expectations Rise Ahead of Inflation Data

Highlights

• U.S. dollar set for third consecutive weekly gain.
• Expectations of further rate hikes in the United States grow.
• Debt ceiling negotiations and political landscape add uncertainty.

Overview

The U.S. dollar was on track for a third consecutive weekly gain as expectations grew that U.S. interest rates would remain elevated for a longer duration than originally anticipated. With traders raising their expectations of further rate hikes in the United States, the index was up 0.8% for the week, poised for another weekly gain.

At 11:00 GMT, June US Dollar Index futures are trading 103.870, down $0.305 or -0.29%. On Thursday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $28.60, up $0.13 or +0.44%.

However, concerns surrounding debt ceiling negotiations between President Joe Biden and top congressional Republican Kevin McCarthy continued to weigh on market sentiment. The approaching “X-date” on June 1, when the government might face difficulties meeting its financial obligations, added to the unease.

Dollar’s Strength Puts Pressure on Pound, Euro and Yen

In early Asia trade, the dollar showed strength, reaching 139.82 yen and peaking at 140.23 yen in the previous session, the highest level since November. The stronger dollar posed challenges for the British pound and the euro. Although the pound inched 0.04% higher to $1.2326, it was still on track for a weekly loss of approximately 1%. The euro, on the other hand, experienced a 0.2% increase, reaching $1.0742, rebounding from a two-month low recorded in the previous session. The euro was additionally weighed down by the confirmation that Germany, the largest economy in Europe, had entered a recession in early 2023.

FOMC Policy Shift Alters Currency Markets

The recent movements in currency markets were primarily influenced by a significant reevaluation of the Federal Open Market Committee’s (FOMC) policy.

According to the CME FedWatch tool, money markets now priced in a roughly 52% probability of the Federal Reserve implementing another 25-basis-point rate increase at its upcoming policy meeting next month, up from a 36% chance a week earlier. Expectations of rate cuts later in the year have also diminished.

Debt Ceiling Worries Boost Dollar

The ongoing concerns regarding the debt ceiling negotiations are providing some support to the U.S. dollar. President Biden and House Speaker McCarthy appeared to be nearing a deal on Thursday, aiming to raise the debt ceiling for a two-year period while imposing spending limits on most items except military and veterans’ expenses.

Although the likelihood of a technical default was deemed very low, it remained significantly higher compared to past debt ceiling stand-offs due to the current political landscape. Consequently, the political brinksmanship added immediate-term uncertainty to the situation.

Technical

The main trend is up. The index has extended its current rally to 104.245 on Thursday after overtaking 103.631 (R1) earlier in the week. This level is new support.

We’re now looking for the rally to possibly extend into 104.406 (R2) over the near-term.

A sustained move under 103.631 (R1) will signal the return of sellers. If this creates enough downside momentum then we could see a retest of 102.405 (S1).  That’s the longer-term support.

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