USD Index remains offered and challenges 104.00 ahead of US ISM

• The index puts the 104.00 region to the test on Thursday.
• The likelihood of a Fed’s pause in June weighs on the dollar.
• The ISM Manufacturing comes next in the docket.

The greenback now accelerates the daily decline and flirts with the 104.00 neighbourhood when tracked by the USD Index (DXY) on Thursday.

USD Index weaker on risk-on mood, Fed’s impasse

The index trades on the defensive and reverses two straight sessions with gains, including a new 2-month peak near 104.40 on May 31, against the backdrop of investors’ repricing of a pause in the Fed’s tightening cycle as soon as June.

Indeed, comments from FOMC Harker and Jefferson late on Wednesday suggested the Federal Reserve could "skip" a rate hike at the next gathering, triggering a change of heart among investors and a subsequent marked sell-off in the buck.

However, data releases in the US docket earlier on Thursday kept signalling a resilient US economy after the ADP report saw the US private sector adding nearly 280K jobs in May and weekly Claims rising by 232K in the week to May 26.

Later in the NA session, the ISM Manufacturing is expected to grab all the attention prior to Friday’s publication of May’s Nonfarm Payrolls (+190K exp.).

What to look for around USD

The index faces some selling pressure near the 104.00 region on the back of renewed optimism surrounding the risk-associated universe.

In the meantime, bets of another 25 bps at the Fed’s next gathering in June suddenly reversed course in spite of the steady resilience of key US fundamentals (employment and prices, mainly), denting the recent rally in the dollar and favouring a further decline in US yields.

Bolstering a pause by the Fed instead appears to be the extra tightening of credit conditions in response to uncertainty surrounding the US banking sector.

Key events in the US this week: ADP Employment Change, Initial Jobless Claims, Final Manufacturing PMI, ISM Manufacturing PMI, Construction Spending (Thursday) – Nonfarm Payrolls, Unemployment Rate (Friday).

Eminent issues on the back boiler: Debt ceiling. Persistent debate over a soft/hard landing of the US economy. Terminal Interest rate near the peak vs. speculation of rate cuts in late 2023/early 2024. Fed’s pivot. Geopolitical effervescence vs. Russia and China. US-China trade conflict.

USD Index relevant levels

Now, the index is losing 0.30% at 103.91 and faces the next support at 100-day SMA at 102.90 seconded by the 55-day SMA at 102.44 and finally 101.01 (weekly low April 26). On the other hand, the surpass of 104.69 (monthly high May 31) would open the door to 105.60 (200-day SMA) and then 105.88 (2023 high March 8).