- The US dollar continues to strengthen after Thursday’s decisive bounce.
- The US dollar index climbed to a fresh one-month high above 102.50 on Friday.
- US banking woes and debt ceiling headlines could continue to drive the valuation of the US dollar.
The US dollar benefited from deteriorating risk-on sentiment on Thursday, posting strong gains against its major rivals. As safe-haven flows continued to dominate action on Friday, the US Dollar Index (DXY) is building on its weekly gains to trade at a one-month high above 102.50.
Although no macroeconomic data from the United States will be released before the weekend, market participants will be keeping a close eye on headlines related to the banking crisis and the debt ceiling. However, the US dollar remains on track for its best weekly performance since mid-March.
Daily roundup of market movements: US dollar gains altitude over the weekend
- US consumer sentiment worsened in early May as the University of Michigan (UoM) consumer confidence index fell to 57.7 (preliminary) from 63.5 in April. This figure was below market expectations of 63.
- The Congressional Budget Office (CBO) projects that unless the debt limit is changed, “there is a substantial risk that at some point in the first two weeks of June, the government will no longer be able to service all of its obligations.”
- Beth Hammack, chair of the Lending Advisory Committee and co-chair of Goldman’s Global Financing Group, recently said that the political stalemate over the US debt ceiling poses a “real risk” to the USD.
- President Joe Biden and top Republican lawmakers have postponed another round of debt ceiling negotiations until next week.
- A securities filing filed by PacWest on Thursday revealed that the bank’s deposits fell nearly 10% last week. As the bank’s shares fell more than 20% following the development, the financial heavyweight Dow Jones Industrial Average lost nearly 0.7% on the day.
- Commenting on the Federal Reserve’s (Fed) policy outlook, “inflation is coming down, but it’s been pretty damn persistent so far, so that means we’re going to have to keep it going for a long time,” the president of the Minneapolis Federal Reserve said. Neel Kashkari.
- US Treasury Secretary Janet Yellen warned on Thursday that a US failure to raise the debt ceiling would cause “economic and financial disaster”. On Friday, Yellen assured that she is working full-time with Congress to raise the debt ceiling.
- Fed Governor Christopher Waller said that when it comes to financial stability, they are worried about things like bank withdrawals, not climate change.
- Core CPI inflation, which excludes volatile food and energy prices, eased slightly to 5.5% in April from 5.6% in March, as expected. Month-on-month, CPI and Core CPI rose 0.4%, in line with analysts’ estimates.
- The BLS reported Thursday that the producer price index (PPI) for U.S. final demand rose 2.3% year-over-year in April, down from a 2.7% increase seen in March.
- Weekly data released by the U.S. Department of Labor showed that Initial Jobless Claims reached a total of 264,000 job applications in the week ending May 6. This print followed the previous week’s unrevised 242,000 and beat market expectations of 245,000.
- Commenting on the US inflation report: “The CPI report is complemented by the Nonfarm Payrolls (NFP) data released less than a week ago, and together there is a compelling case for a pause,” FXStreet analyst Yohay Elam said. “Investors are already seeing a growing chance of a rate cut, and that is weighing on the dollar.”
- The CME Group FedWatch Tool shows that markets are pricing in a more than 80% chance that the Fed will keep its interest rate unchanged at its next policy meeting.
- The yield on the benchmark 10-year U.S. Treasury note fell nearly 2% on Thursday before stabilizing near 3.4% early on Friday.
- Earlier in the week, the Fed noted in its first-quarter Loan Officer Survey that respondents reported tighter standards and weaker demand for commercial and industrial (C&I) loans for large and mid-sized firms. “Banks reported tighter standards and weaker demand for all categories of commercial real estate loans,” the publication continued.
- Federal Reserve Bank of New York President John Williams told the Economic Club of New York on Monday that the Fed must be data-driven in its monetary policy, noting that the Fed will raise rates again if necessary.
Technical analysis: The US dollar index is gaining momentum
The US dollar index (DXY) climbed above the 50-day SMA for the first time since late March on Friday, and the Relative Strength Index (RSI) on the daily chart rose to 60, indicating an increase in bullish momentum. Buyers could retain control if DXY closes the week above 102.50.
On the upside, 103.00 (100-day SMA) aligns as another bullish target ahead of 103.60 (static level since February) and 104.00 (psychological level, static level)
On the downside, 102.50 (50-day SMA) is leveled as first support before 102.00 (psych level, static level) and 101.65 (20-day SMA).
How does Fed policy affect the US dollar?
The US central bank (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as a primary tool to achieve its goals, but it must strike the right balance. If the Fed is concerned about inflation, it will tighten policy by raising interest rates to raise borrowing costs and encourage savings. In this scenario, the US dollar (USD) is likely to gain value due to a shrinking money supply. On the other hand, the Fed could decide to ease its policy through a rate cut if it is concerned about rate hikes Unemployment rate due to a slowdown in economic activity. Lower interest rates likely to lead to increased investment and allow companies to hire more people. In that case, the USD is expected to lose value.
The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE means the Fed buys assets like the government bonds, in the open market to stimulate growth and QT is the exact opposite. QE is widely seen as a negative central bank measure against the USD and vice versa.
