|

US Dollar rallies amid risk aversion, markets eye US debt ceiling talks

  • US Dollar found its footing following Wednesday's dismal performance.
  • US Dollar Index climbs above 102.00, turns positive for the week. 
  • US debt ceiling deadlock continues as the deadline approaches.

The US Dollar has gathered bullish momentum on Thursday after having struggled to find demand following the April United States (US) inflation data on Wednesday. The US Dollar Index (DXY) continues to stretch higher and clings to strong daily gains above 102.00.

The US Bureau of Labor Statistics (BLS) reported on Wednesday that the Consumer Price Index (CPI) rose 4.9% on an annual basis in April. This reading followed the 5% increase recorded in March and came in below the market expectation of 5%. With the initial market reaction, the USD started to weaken against its rivals with investors remaining convinced that the US Federal Reserve (Fed) will pause its tightening cycle in June.

Early Thursday, the heavy selling pressure surrounding the Euro amid contradicting headlines surrounding the European Central Bank's (ECB) rate outlook helped the USD capture some of the capital outflows. In the second half of the day, the USD capitalized on safe haven flows after Wall Street's main indexes opened lower. 

The looming debt ceiling crisis in the US, however, emerges as a key risk factor for the USD in the short term. Beth Hammack, Chair of the Treasury Borrowing Advisory Committee and Co-Head of Goldman's Global Financing Group, said recently that a political deadlock over the US debt ceiling poses a "real risk" for the USD. President Joe Biden and top Republican lawmakers will have further talks on Friday.

Daily digest market movers: US Dollar continues to gather strength

  • Commenting on the policy outlook, "inflation is coming down, but so far it's been pretty darn persistent, that means we are going to have to keep at it for an extended period of time," said Minneapolis Federal Reserve President Neel Kashkari. 
  • US Treasury Secretary Janet Yellen warned on Thursday that a US default on a failure to raise the debt ceiling would produce an "economic and financial catastrophe."
  • Fed Governor Christopher Waller said that they are worried about things like bank deposit runs, not climate change, when it comes to financial stability.
  • The Core CPI inflation, which excludes volatile food and energy prices, edged lower to 5.5% in April from 5.6% in March as expected. On a monthly basis, the CPI and the Core CPI rose 0.4%, matching analysts' estimates.
  • The BLS reported on Thursday that the Producer Price Index (PPI) for final demand in the US rose 2.3% on a yearly basis in April, down from the 2.7% increase recorded in March.
  • The weekly data published by the US Department of Labor showed that Initial Jobless Claims totaled 264,000 in the week ending May 6. This print followed the previous week’s unrevised 242,000 and came in above the market expectation of 245,000.
  • Commenting on the US inflation report, "the CPI report comes on top of the Nonfarm Payrolls (NFP) figures released less than a week ago, and together there is a compelling case for pausing," said FXStreet Analyst Yohay Elam. "Investors already see a growing chance of rate cuts, and that weighs on the Greenback." 
  • The CME Group FedWatch Tool shows that markets are pricing in a more than 90% probability of the Fed leaving its policy rate unchanged at the next policy meeting.
  • The benchmark 10-year US Treasury bond yield is down nearly 5% below 3.4% after it rose above 3.5% earlier in the week.
  • The Fed noted in its Loan Officer Survey for the first quarter that respondents reported tighter standards and weaker demand for commercial and industrial (C&I) loans to large and middle-market firms. "Banks reported tighter standards and weaker demand for all commercial real estate loan categories," the publication further read.
  • Earlier in the week, Federal Reserve Bank of New York President John Williams told the Economic Club of New York on Tuesday that the Fed needs to be data-dependent with monetary policy and reminded that the Fed will raise rates again if needed.

Technical analysis: US Dollar Index rises above key hurdle

The US Dollar Index (DXY) climbed above 101.65, where the 20-day Simple Moving Average (SMA) is located. In case DXY closes the day above that level, it could target 102.50 (50-day SMA) and 103.00 (psychological level, 100-day SMA) next.

Meanwhile, the Relative Strength Index (RSI) indicator on the daily chart rose slightly above 50, pointing to a buildup of bullish momentum.

In case 101.65 fails to hold as support, sellers could show interest and drag DXY toward 101.00 (static level, psychological level). A daily close below the latter could open the door for an extended slide to 100.00.

How is US Dollar correlated with US stock markets?

Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation. 

During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

More from Eren Sengezer
Share:

Editor's Picks

AUD/USD remains below 0.7000 amid light trading

AUD/USD fills a modest bearish gap on Monday, but remains below 0.7000 in the Asian session amid holiday-thinned liquidity. The US Dollar attempts a bounce even as US bond yields pull back from multi-year highs, limiting the pair. Moreover, diminishing odds of another RBA rate hike in November cap the Aussie.

USD/JPY hovers above 158.00 amid Japan/ US holiday

USD/JPY extends its range-bound price action into a new week, trading above 158.00 as bulls remain on high alert amid speculation that authorities will step in to prop up the Japanese Yen. Meanwhile, softer US bond yields keep US Dollar bulls on the back foot and cap the pair's upside. However, geopolitical uncertainties could limit losses for the safe-haven buck amid thin liquidity due to a holiday in Japan and the US.

Gold eases from one-week top, falls below $4,200 as hawkish Fed and Iran risks support USD

Gold attracts some sellers after touching a one-week high earlier this Monday, sliding back below the $4,200 mark during the European session and snapping a two-day winning streak. The US Federal Reserve's hawkish outlook helps limit the downside for the US Dollar, and caps the non-yielding bullion. Meanwhile, crude oil prices fell amid hopes that the Russia-Ukraine energy ceasefire deal will ease global fuel shortages and, in turn, reduce inflationary risks.

Cardano holds above EMAs as recovery builds

Cardano (ADA) reclaims trading above the key support zone on Monday after a 2.85% correction last week. Improving derivatives positioning and constructive technical outlook support a recovery for ADA. Derivatives data shows an improving sentiment among Cardano traders. CoinGlass’ long-to-short ratio for ADA reads 1.01 on Monday, flipping into green territory.

USD/INR: Deep in red below 96.00 as RBI rescues Indian Rupee

After opening significantly higher against the US Dollar (USD) on Monday, the Indian Rupee (INR) clings to recovery gains near 95.80. The pair remains undermined by the Reserve Bank of India’s (RBI) fresh measures to curb US Dollar demand, which has brought relief for the Indian currency.

Has Bitcoin really escaped the macro forces it was built to fight?
Over 17 years ago, Satoshi Nakamoto designed Bitcoin (BTC) on the back of a global financial crisis as an alternative to the global monetary system outside the control of central banks, governments and traditional intermediaries. This raises a key question: has Bitcoin really become independent of the macroeconomic forces it was built to challenge?