USD Price Forecast: Debt Ceiling Optimism Supportive of Dollar Index (DXY)

U.S. DOLLAR ANALYSIS & TALKING POINTS

• US debt ceiling theme the main driver for markets.
• Will US PMI push manufacturing below 50?
• DXY exhibits hesitancy around 103.42 resistance level.

USD FUNDAMENTAL BACKDROP

The Dollar Index (DXY) has been dancing to the tune of US debt ceiling negotiations and yesterday’s discussions prompted renewed optimism in global markets. The dollar ticked slightly higher and trades relatively flat this Tuesday morning. While no deal was struck, both representatives (president Joe Biden and House Speaker Kevin McCarthy) stated the talks were constructive; however, more negotiations will be required to avoid a default.

Yesterday included a slew of Fed speakers with the Fed’s Bullard surprising markets by calling for possibly two more interest rate hikes while Mr. Kashkari opted for a more cautious tone unsure of a pause or hike in the June meet. This slightly hawkish rhetoric has now cut down rate cut expectations as seen by the implied Fed funds futures below. Money markets are now pricing in roughly 34bps of rate cuts by year end as opposed to 41bps just yesterday. Limiting upside for the dollar has been aggressive ECB officials who have been ramping up monetary policy tightening dialogue – eurozone PMI will also add to the economic outlook for the region later this morning.

FEDERAL RESERVE INTEREST RATE PROBABILITIES

Source: Refinitiv

That being said, the week ahead contains several high impact economic data from the US including GDP, durable goods orders, consumer sentiment and core PCE; all of which will give markets and the Fed valuable data as to forward guidance. Later today, more Fed speak will provide short-term volatility as well as US PMI (S&P). Both manufacturing and services are projected to decline possible pushing manufacturing into contractionary territory should actual figures come in lower.

ECONOMIC CALENDAR

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

U.S. DOLLAR INDEX DAILY CHART

Chart prepared by Warren Venketas, IG

Daily DXY price action has slowed regarding its upside momentum as the index approaches overbought territory as measured by the Relative Strength Index (RSI). While there is still more room for an extended rally, this could be capped around the 104.00 psychological resistance handle. For now, price movement depends on debt ceiling updates (as is the case with most markets) and the sooner there is clarity, the sooner markets can focus on the Fed and US economic data.

Resistance levels:

• Trendline resistance
• 104.00
• 103.42

Support levels:

• 102.81
• 50-day MA (yellow)
• 101.42
• 101.00

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