The USD Index

The USD Index (DXY), which measures the strength of the US dollar against a basket of major currencies, continues to exhibit a bullish sentiment, surpassing the 104.00 level on Thursday.

The USD Index persists in its upward trajectory for the third consecutive session this week, displaying optimism despite the recent shift in market expectations regarding a potential interest rate hike by the Federal Reserve at its June 14 meeting.

Boosted by positive developments, the US dollar’s positive sentiment is further supported by the passage of legislation in the House of Representatives on Wednesday night. The bill extends the suspension of the nation’s debt ceiling until January 1, 2025, to avert the risk of an unprecedented debt default. However, it still requires Senate approval and President Joe Biden’s signature to become law.

The change in sentiment regarding a potential rate hike was prompted by comments made by FOMC members Harker and Jefferson, suggesting the possibility of a pause in the hiking cycle in June. These remarks caused investors to abruptly reassess their positions, leading to a partial retreat of the dollar from its recent highs near 104.70 (reached on May 31).

The likelihood of a pause in the Fed’s meeting next month, as indicated by CME Group’s FedWatch Tool, currently stands at around 65%, a significant increase from the previous day’s estimate of nearly 33%.

Turning our attention to the US economic calendar, the upcoming session offers several noteworthy events, with particular focus on the labor market data, including the ADP report and weekly Initial Claims. Additionally, the ISM Manufacturing PMI, the final S&P Global Manufacturing PMI, and Construction Spending figures are also anticipated and can influence market sentiment.

Key Points about the USD to Consider
The USD Index maintains its positive performance above the 104.00 level, bolstered by optimism surrounding the debt ceiling issue and a lack of traction in riskier assets.

Furthermore, expectations of a 25-basis-point rate hike at the next Fed meeting in June are supported by the robust performance of vital US fundamentals, particularly employment and prices. This strength is reinforced by the ongoing surge in US yields and the overall performance of the USD.

However, an alternative perspective suggests that the Fed may choose to pause, considering the potential tightening of credit conditions in response to uncertainties within the US banking sector.


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