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US Dollar still higher as US debt ceiling, weak China's Yuan and geopolitical tensions are at play

  • US Dollar is testing the intraday high on Wednesday as the US trading session is set to kick in.
  • US Dollar Index is consolidating after a key technical breakout which points to more upside potential. 
  • Nomura joined JP Morgan and Barclays in cutting growth forecasts for China this year, chasing Yuan investors away and into US Dollar.

The demand for the US Dollar (USD) is not abating at the start of the US session as the Greenback remains bid after a small pause earlier this week, where the USD was able to catch its breath after its rally last week. The US Dollar Index (DXY) rally is the result of comments from United States Speaker of the House Kevan McCarthy, who said there is still a lot of ground to cover to get the debt ceiling lifted. Additional tailwind for the Greenback came from Nomura, which has cut the growth forecast for China, and triggered another risk-off wave on Wednesday at the start of the European session to spook investors and saw them dumping the Chinese Renminbi for the Greenback, advancing 150 pips intraday. 

On the macroeconomic data front, US Building Permits are due to come out at 12:30 GMT, and the weekly Energy Information Administration (EIA) oil numbers at 14:30 GMT will start to come more in focus after reports that the US Department of Energy wants to rebuild its Strategic Petroleum Reserves. Later on the day, the US Treasury is set to auction some 20-year Treasury bond paper, and a Senate banking hearing is taking place on strengthening Federal Reserve accountability..

Daily digest market movers: US Dollar heads another leg higher

  • A headline from NORAD reporting a Russian aircraft was detected in Alaskan air defense zone, triggered a brief pop in the US Dollar Index.
  • US MBA Mortgage Applications dropped substantially from 6.3% last month to -5.7% for May. 
  • Housing Starts came out in line with consensus for April at 1,401K. Building Permits were nearly unchaged from 1,413K in March to 1,416K for April. 
  • US Opposition leader of the House Jeffries says he's optimistic for common ground on debt limit, talks were positive on Tuesday. Alongside his comments, McCarthy said there won't be any tax discussion in the debt talks. 
  • Chinese Yuan breaches key level 7 against USD for the first time this year as post-covid outlook proves not to be so positive after all.
  • US president Biden will cut short his G7 trip to continue working on the US default deadline avoidance. 
  • US Retail Sales on Tuesday came out mixed, with the monthly Retail Sales advancing at 0.4%, undershooting estimates of 0.8%. The upward revision from the prior -1.0% to -0.7% boosted confidence in the US Dollar. Even ex-Auto numbers for the US Retail Sales were revised higher from -0.8% to -0.5%. 
  • The Congressional Budget Office (CBO) projects that if the debt limit remains unchanged, "there is a significant risk that at some point in the first two weeks of June, the government will no longer be able to pay all of its obligations."
  • Secretary of the US Treasury Janet Yellen made a televised interview twice where she mentioned that not lifting the debt ceiling would have catastrophic implications, which was instantly followed by a pop higher in the US Dollar Index briefly after the interview aired. 
  • President Joe Biden and top Republican lawmakers are set to continue working on the debt ceiling impasse this week. Headlines this week show there is still more work to be done, and a deal is not yet on the table. 
  • The banking crisis is fading a bit into the background as markets are starting to focus more on central bankers and the stronger Retail Sales numbers from Tuesday. 
  • The CME Group FedWatch Tool shows that markets are pricing in a 20% probability of the Fed hiking another 25 basis points at the next policy meeting. The chance of a rate cut in July is softening a touch since Monday, with a drop to only 25%. 
  • The benchmark 10-year US Treasury bond yield continues its rally and heads above 3.52% on the back of the shift in CME Group FedWatch expectations for the Fed meeting in June.

US Dollar Index technical analysis: Set for the next sprint higher 

The US Dollar Index (DXY) made its way above the 55-day Simple Moving Average (SMA) at 102.59 and is, at the time of writing, taking out the 100-day SMA at 102.90. Expect to see some easing as the European session continues, making it interesting to observe if the 100-day SMA will now act as a support after being a resistance. 

On the upside, 105.81 (200-day SMA) aligns as the next bullish target with 104.00 (psychological level, static level) as an intermediary element to cross the open space.

On the downside, 102.60 (55-day SMA) aligns as the first support before 102.00 (psychological level) and 100.80 (low of 2023, static level).

What is US Dollar Index (DXY)?

The US Dollar Index, also known as DXY or USDX, is a benchmark index that was established by the US Federal Reserve in 1973. DXY is widely used as a tool measuring the US Dollar (USD) value in global markets. The index is calculated by measuring the US Dollar’s performance against a basket of six foreign currencies, the Euro, the Japanese Yen (JPY), Swedish Krona (SEK), the British Pound (GBP), the Swiss Franc (CHF) and the Canadian Dollar (CAD).

With 57.6%, the Euro has the biggest weight in the index followed by the JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%). Hence, a sharp decline in the EUR/USD pair could help the US Dollar Index rise even if the US Dollar weakens against some of the other currencies in the basket.

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Filip Lagaart

Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.

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