US Dollar (DXY): Strengthening on Debt Ceiling Progress, Fed Expectations

DXY Highlights

• Dollar near seven-week high due to debt ceiling negotiations.
• Investors reduce expectations of Federal Reserve easing.
• Traders pricing in possibility of rate increase at June Fed meeting.

DXY Overview

The U.S. dollar remained near a seven-week high on Thursday as President Joe Biden and top Republican Kevin McCarthy made efforts to prevent a damaging debt default. Additionally, investors scaled back their expectations of Federal Reserve easing.

The June US Dollar Index, which measures the currency against a basket of major counterparts, is trading 102.945, up 0.219 or +0.21%, close to its March 24 high of 103.025.  On Wednesday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $28.15, up $0.06 or +0.21%.

Determination to Raise Debt Ceiling

Biden and McCarthy expressed their determination on Wednesday to reach a deal promptly in order to raise the government’s debt ceiling of $31.4 trillion. This came after a prolonged standoff and an agreement to negotiate directly. The debt ceiling situation is viewed as beneficial for the dollar in the short term. If the situation worsens, there could be a global economic downturn, leading investors to seek the safety of the dollar. Conversely, if the issue is resolved, expectations for the Federal Reserve may change, potentially resulting in an interest rate hike.

Traders Anticipate Fed Interest Rates

Traders are currently pricing in a roughly 20% chance that the Federal Reserve will raise its interest rate at its June meeting. About a month ago, there was a similar probability of a rate cut. The rate traders have priced for the Fed’s December meeting suggests around 55 basis points of easing by the end of the year, a decrease of approximately 5 basis points from the previous day.

Currencies Reflect Market Sentiment

The euro remained weak, hovering near a six-week low of $1.08105 and traded at $1.0817. Meanwhile, the British pound fell 0.3% to $1.2450. In contrast, the dollar strengthened against the Japanese yen, reaching a ten-week high of 137.89 yen, extending its nearly 1% gain from the previous day. Market sentiment particularly influences the dollar/yen currency pair, and positive developments in the debt ceiling negotiations recently contributed to a partial recovery in dollar/yen losses.

Positive Short-Term Forecast for Dollar

The U.S. dollar is forecasted to be bullish in the short term. Efforts to avoid a debt default and reduced expectations of Federal Reserve easing have strengthened the dollar. The dollar index has reached a seven-week high, indicating positive momentum. Observers view the debt ceiling situation as advantageous for the dollar, and a resolution has the potential to lead to an interest rate hike, further bolstering the currency. Traders are pricing in the possibility of a rate increase at the Federal Reserve’s June meeting.

Technical Analysis

The main trend is up. The index extended its rally over 102.405 (S1) earlier today. It could run into some minor top resistance at 103.025 (R2), but overcoming this level could trigger an acceleration into 103.631 (R3).

A failure to hold 102.405 (S1) will be a sign of weakness. If this creates enough downside momentum then look for the selling to possibly extend into the next support at 101.797 (S2).