US Dollar gets to keep gains after mixed PMI numbers

• US Dollar rallies as the US Dollar Index prints a new two month high. 
• US debt-ceiling talk uncertainty and a jump in the yield curve underpin the US Dollar. 
• US Dollar Index pairs back incurred losses from Monday as the Greenback acts as safe haven with equities and bonds on the back foot. 

The US Dollar (USD) holds on to its gains after mixed sector numbers came out for the Purchase Manager's Index with Services holding strong and Manufacturing contracting. The US Dollar Index (DXY) has consolidated and is primed to continue higher as a crucial support level held on Monday, while tail risk is being priced in after US chip-manufacturer Micron got barred from China, with Japan and South-Korea eager to take over the business. While all eyes are still on the lingering debt ceiling discussions, yields are heading higher and US CME Fed Futures are pointing to another rate hike for July and rate cutes moved to the end of 2023, which the current PMI numbers further confirm. 

On the macroeconomic data front, traders saw the US Manufacturing PMI for May contracting to 48.5, from 50.2 previous, while the Services and the Compositie index both advanced from respectively 53.6 to 55.1 for Services and from 53.4 to 54.5 for the composite index. The Richmond Fed Manufacturing index confirms the earlier PMI number for the sector with a contraction, while Business Conditions are improving a touch. Several headlines at the start of the US trading session are hitting the wires around the US debt ceiling where the positive mood of Monday evening has turned into a more depressive mood as McCarthy is alluding to an impasse on the spending budget.  

Daily digest: US Dollar safe haven in headline risk on debt ceiling 

• Richmond Fed Manufacturing Index contracts -15 from -10 / Business Conditions bounce a little to -17, coming from -27. 
• US S&P Global May Flash Services PMI at 55.1 vs 53.6 from April / Flash Composite PMI at 54.5 vs 53.4 in April / Flash Manufacturing PMI 48.5 vs 50.2 in April.
• Republican debt ceiling negotiator representative Graves said Republicans and White House are still far apart on tdeb ceiling. Talks to resume today at 14:00 GMT.
• McCarthy told the GOP a deal is not close yet, asks lawmakers to stay within 24 hours.  
• Second-tier data from teh US May Philadelphia Fed non-manufacturing index contracted to -16.0, coming from previous -22.8.
• Fed's Kashkari madesome additional surprise comments that rates need to stay higher for longer and more data is needed in order to convince the Fed that inflation is on the right track.
• US Credit Default Swaps (CDS) are jumping higher again after coming off the highs on Friday.
• Former Treasury Secretary Mnuchin said that the US is moving closely to a debt deal as talks drag on another day. Meanwhile Mnuchin said as wel that he sees the Fed being close to or being done hiking while markets are wrong footed on the Fed rate cutes later this year.
• US equity futures are mildly in the red with the VIX still unchanged at 17 as of Monday. European stocks took a leg lower after China's Hang Seng closed -1.25%. 
• US Dollar printed a new monthly high against Chinese Yuan at 7.0600.
• JP Morgan CEO Dimon commented that rates will go higher from here and that the markets are unprepared for it. 
• US President Joe Biden confirmed after talks with US House Speaker Kevin McCarthy that a default is off the table. 
• McCarthy came out and said talks were productive, but no deal yet. The tone of discussion was better than before. 
• The United States is working with allies like South Korea and Japan to circumvent any chip supply disruptions after US chip-manufacturer Micron got barred in China. 
• Next to Neal Kashkari, Fed’s Jim Bullard came out in support for at least one, preferably two rate hikes on Monday.
• Markets were briefly rattled on Monday by comments from Kashkari that the Fed will not bail out the US economy if a debt default occurs. 
• The CME Group FedWatch Tool shows that markets are pricing in a rate hike for July after hawkish comments from Fed's Bullard and Kashkari. Rate cuts have moved down the line, to earliest November 2023.
• The benchmark 10-year US Treasury bond yield trades at 3.75% and prints a new high for the past month. This could allow to push the US Dollar higher and the DXY further in the green. On the long end of the yield curve, the 30 year yield has risen to 4% for the first time since March. 

US Dollar Index technical analysis: DXY prints fresh high in two months

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 on the upside. Support held on Monday and is confirming continuation to the upside in order to challenge 103.61, the high of past Thursday. 

On the upside, 105.76 (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, 102.86 (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 102.48 in order to assess any further downturn or upturn. 

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in 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 refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.