US Dollar Index: Anxiety ahead of Fed Powell’s speech, US debt limit news prods DXY bulls at two-month high

• US Dollar Index bulls take a breather at multi-day top after three-day uptrend.
• Hawkish Fed bets, hopes of no US default underpin US Treasury bond yields and DXY run-up.
• Challenges to US debt ceiling deal, likely spat between the Washington and Beijing over Taiwan poke US Dollar Index bulls.
• Fed Chair Powell’s speech, US President Biden’s conference eyed for clear directions.

US Dollar Index (DXY) remains sidelined near 103.50 as it makes rounds to the highest levels in two months amid Friday’s sluggish session, mainly due to the latest challenges to the US Dollar and sentiment. Even so, hawkish Federal Reserve (Fed) concerns and hopes of no US default put a floor under the DXY.

The market’s bets on the Fed rate cut in 2023 dropped heavily in recent days while the odds of a 0.25% rate hike in June gained acceptance, even with little speed. The same allows the US Dollar and yields to remain firmer.

Behind the hawkish Fed bets are the latest US data and Fed talks. That said, US Initial Jobless Claims for the week ended on May 12 dropped to 242K on Thursday, versus 254K expected and 264K prior whereas the Philadelphia Fed Manufacturing Survey gauge for May improved to -10.4 from -31.3 prior, versus -19.8 market forecasts. Further, US Existing Home Sales for April eased to 4.28M versus analysts’ estimations of 4.3M and 4.44M prior. It’s worth noting that the US Retail Sales and Industrial Production for April printed upbeat figures earlier in the week and inspired the Fed hawks to defend their “higher for longer rates” bias, which in turn allowed the US Dollar to regain its power.

In a case of the Federal Reserve officials’ comments, Dallas Federal Reserve President Lorie Logan said on Thursday, as reported by CNBC, that data at this time does not support skipping an interest rate hike at the next meeting in June. On the same line, Fed Governor Philip Jefferson said on Thursday that inflation remains too high whereas St Louis Fed President James Bullard reiterated his support for higher rates.

Furthermore, the latest speeches from US President Joe Biden and Republican US House Speaker Kevin McCarthy keep markets hopeful of witnessing no default of the US in paying its government debt. The same allows the US Dollar and yields to remain firmer.

Contrary to what’s mentioned above, the latest challenges for US President Biden in avoiding the US default and the likely escalation in the US-China tussles due to the trade deal between the US and Taiwan seem to cap the DXY. Also pausing the DXY run-up could be the market’s anxiety ahead of Federal Reserve Chairman Jerome Powell’s speech.

As markets turn optimistic about no US default, backed by the latest speeches from US President Joe Biden and Republican US House Speaker Kevin McCarthy, Reuters came out with a warning note while citing the powerful group of the US decision-makers, namely the House Freedom Caucus. “The small but powerful Republican faction warned this week that they could try to block any agreement to raise the $31.4 trillion debt ceiling from passing the House of Representatives, if the accord does not contain ‘robust’ federal spending cuts,” said the news.

On the other hand, the US Trade Representative's (USTR) office announced on Thursday that The US and Taiwan reached an agreement on the first part of their ‘21st Century’ trade initiative, covering customs and border procedures, regulatory practices, and small business. This comes ahead of planned meetings between China's Commerce Minister Wang Wentao and USTR Tai and US Commerce Secretary Gina Raimondo, which in turn can propel the Sino-American tension and prod the US Dollar advances.

Amid these plays, S&P 500 Futures struggle to track Wall Street’s gains while posting a minor upside near the 4,220 level.

Moving on, Federal Reserve (Fed) Chairman Jerome Powell’s speech and US debt ceiling negotiations will be the key as US President Joe Biden said to have the decision to avoid a default by Sunday. Should Fed Chair Powell manage to defend the latest hawkish bias about the US central bank, the US Dollar may have a further upside to track. On the other hand, US President Joe Biden’s inability to seal the deal could trigger the US Dollar’s slump.

Technical analysis

The first daily closing beyond the 100-DMA in more than 2.5 months allow the US Dollar Index (DXY) bulls to aim for a downward-sloping resistance line from late November, around 104.40 by the press time.