US Dollar (DXY): Retreats from Two-Week High as Rate Hike Expectations Dim

Highlights

• US dollar weakens as rate hike expectations fade.
• Debt ceiling deadline boosts demand for safe-haven assets.
• Federal Reserve likely to delay rate hike amid inflation concerns.

US Dollar Retreats Amid Rate Hike Doubts

On Thursday, the US dollar relinquished its position at a two-week high against other major currencies as investors scaled back expectations of an imminent interest rate hike by the Federal Reserve. However, the dollar found some support as the approaching debt ceiling deadline drove investors towards safe-haven assets.

The US House of Representatives, divided in its stance, passed a bill to temporarily suspend the $31.4 trillion debt ceiling on Wednesday. The focus now shifts to the Democratic-led Senate, as the federal government is on the verge of running out of funds to meet its financial obligations.

Consequently, the US dollar index dipped by 0.2% to 104.10, retreating from the previous session’s over two-month high. Traders adjusted their expectations of a rate hike by the Federal Reserve this month.

Federal Reserve Considers Delaying Rate Hike

Federal Reserve officials, including the vice chair-designate, hinted at the possibility of delaying a rate hike in June. This delay would allow the central bank to assess the impact of its current tightening cycle in light of persistent inflationary pressures.

According to the CME FedWatch tool, market participants now estimate a roughly 26% probability of a 25 basis point rate increase at the upcoming Federal Reserve meeting. This is a decrease from the nearly 67% chance estimated just a day earlier.

Despite the recent US economic data favoring another rate hike in the near term, the prevailing expectation is that the Federal Open Market Committee (FOMC) has already concluded its current cycle of tightening.

Japanese Yen Weakens Amid Currency Monitoring

In other currency news, the Japanese yen weakened by nearly 0.2% to 139.64 per dollar. Japanese financial authorities convened earlier in the week following the yen’s decline to a six-month low against the US dollar. Japan’s top diplomat emphasized their commitment to monitoring currency movements closely and keeping all options open.

Investors Await Crucial Employment Data

Investors eagerly awaited key employment data, including the ADP employment change report for May and weekly initial jobless claims data, both scheduled for release on Thursday. Additionally, the payroll report for April, set to be published on Friday, and ISM’s purchasing managers’ index report for the manufacturing sector, due on Thursday, were anticipated for insights into the labor market and potential indications of a forthcoming US economic downturn.

These data releases are expected to play a crucial role in shaping the Federal Reserve’s future monetary policy decisions, particularly concerning interest rates, and could offer clues about the possibility of an impending recession in the US economy.

Technical Analysis

The main trend is up, however, today’s price action suggests momentum may be shifting to the downside.

On Wednesday, the index took out 104.406 (R1), but settled below it. This re-established the level as resistance.

A sustained move over 104.406 (R1) will indicate the buying is getting stronger. This could trigger an acceleration to the upside with 104.720 (R2) the first target, followed by 105.490 (R3).

A sustained move under 104.406 (R1) will signal the return of sellers. If this creates enough downside momentum then we could see a retest of 103.631 (S1). Not only is this support, but also the trigger point for an acceleration to the downside.

For a look at all of today’s economic events, check out our economic calendar.