US Dollar back to flat on Monday as the US session creates volatility with debt ceiling talk headlines

The US Dollar (USD) is back to flat after turning bearish this Monday in the wake of the US trading session and after trading sideways for the most part of Monday with the US Dollar Index (DXY) going nowhere for the bigger part of the day. Biggest winners against the USD are Asian currencies with the South Korean Won (KRW) as biggest winner. Fed's Kashkari spooked  traders with comments that the Fed cannot protect the US economy from a debt default. 

On the macroeconomic data front, traders will be mulling the small progress on the United States debt ceiling talks, while some surprise positive news comes from the banking sector with PACWEST selling a big chunk of its real estate loan portfolio in an attempt to dimish its risk. This week, several important US macroeconomic data points will be released and could have a big impact on the US Dollar, with PMI numbers on Tuesday, FOMC Minutes on Wednesday, Durable Goods and the PCE Price Index, which is the Fed’s preferred inflation metric, on Friday, leading the way. Fed officials are taking the stage as well this Monday with Bullard, Daly, Bostic and Barkin all set to speak at one point in several events or debates, as colleague Kashkari has expressed already his point of view in early comments this Monday.

Daily digest: US Dollar flat again after comments from Fed's Kashkari sends DXY briefly lower

• McCarthy's aide mentioned that the White House negotiators are set to arrive for early talks on Monday. 
• Fed's Bullard issued comments that a recession is not his base case and that probabilities of a US recession are overstated. He sees two more rate hikes this year before reaching the base rate.
• Fed's Kashkari sets the record straight at the cusp of the US trading session with comments that a a June rate hike is close call for him, reiterating that FED needs to keep going on fighting inflation and a wake-up call for traders that the Fed cannot be expected to protect the US economy from a debt default. 
• As the European trading session advances towards the closing bell, indices across the board are eking out deeper losses. 
• Several Fed speakers are set to take the stage with special attention for Bullard at 12:30 GMT on US Economy and Monetary Policy in virtual event. 
• PACWEST issues a statement where it is set to sell $2.6B of its real estate loan book to Kennedy Wilson in an attempt to lower its rate exposure on its balance sheet. 
• US President Joe Biden commented on Monday morning out of Japan that calls with US House Speaker and Republican Kevin McCarthy went well and that talks will resume tomorrow. 
• McCarthy, from his side, reiterated that talks will not progress as long as President Biden has not returned to the US. 
• Over the weekend, US Treasury Secretary Janet Yellen threw a small spanner in the works by saying that the US Treasury has a quite low probability of being able to pay its bills by June 15.
• On Friday, US Fed Chairman Jerome Powell attended a panel discussion with former Fed Chair Ben Bernanke. Powell commented that rates may not need to rise as high given current credit stress. 
• The CME Group FedWatch Tool shows that markets are flip-flopping again after these comments from Powell on Friday and have priced out again a rate hike for June, while an initial rate cut has been delayed until September instead of July before. 
• The benchmark 10-year US Treasury bond yield trades at 3.69% and is showing signs of recovery after it retreated from peaking to 3.71% on Friday.  

US Dollar Index technical analysis: Important start of the week

The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.52 and 102.87. For now, the support looks to be holding at 103 and could see the DXY heading back to challenge 103.61, the high of past Thursday. 

On the upside, 105.79 (200-day SMA) still acts as the big target to hit, as the next upside target at 104.00 (psychological level, static level) acts as an intermediary element to cross the open space.

On the downside, 102.87 (100-day SMA) aligns as the first support level to make sure that . In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.52 in order to assess any further downturn or upturn. 

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.