US Dollar unchanged on Monday as debt ceiling talks turn less positive and Asian currencies advance
- US Dollar is little changed and marginally negative halfway through the European trading session.
- US Dollar Index caught between two forces with on one side Asian currencies gaining traction against the Greenback and remaining G7 currencies weakening.
- US stock futures point to a mixed opening on Monday as traders are still chosing sides for this week.
The US Dollar (USD) is showing a very mixed picture this Monday with two clearly defined regions explaining why the US Dollar Index (DXY) is going nowhere. The US Dollar is gaining against most G7 currencies like the Euro or Swedish Krona, with the exception of Asian pairs such as the South-Korean Wong (KRW) and the Japanese Yen (JPY), which are gaining traction against the Greenback. Even halfway through the European trading session, most of the Asian currencies are trading nearby session’s low against the US Dollar.
On the macroeconomic data front, traders will be mulling the 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 will be released and could have big impact on the US Dollar, withPMI numbers on Tuesday and 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 Bulard, Daly, Bostic and Barkin all set to speak at one point in several events or debates.
Daily digest: US Dollar unable to chose sides and goes for the middle ground
- Halfway in the European trading session stocks are turning higher in cautious trading.
- 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.
- Fed’s Kashkari came out with a call for higher capital requirements for US banks.
- 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 3.65% and is showing further signs of retreat after peaking to 3.71% on Friday. This could allow for some US Dollar bearish correction.
US Dollar Index technical analysis: Will the uptrend hold?
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 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.