US Dollar higher as safe haven flow grows another day

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• US Dollar keeps booking gains against most of its peers as the Greenback holds safe haven status.
• US debt-ceiling talks continue with no sings of a solution while Fitch issues a negative outlook for the US credit rating.
• US Dollar Index consolidated above 104, next level on the upside is at 105.

The US Dollar (USD) keeps heading higher in a rally for this week with a four-day winning streak. Comments overnight from US Treasury Secretary Janet Yellen and the FOMC Minutes confirmed what traders assumed, that the current play with the USD as safe haven is still very much valid. Meanwhile US debt-ceiling talks ended again unresolved but with good progress according to US House Speaker Kevin McCarthy. 

On the macroeconomic data front, traders will look at the second estimate of US Gross Domestic Product (GDP) numbers for the 1st quarter at 12:30 GMT. Initial Jobless Claims at that same time will show a glimpse of how the employment market is doing.  Throughout the day it will be worth wild to keep an eye on 1-year US Treasury Bills (T-bills) as they have been soaring to 7% on Wednesday, with US Credit Default Swaps (CDS) back at the highs. Fed officials are set to speak with Thomas Barkin talking at 13:30 GMT at an Economic Forum and then Susan Collins at 14:30 GMT.

Daily digest: US Dollar keeps pushing higher

• US Treasury Secretary Yellen reiterated that the US government may run out of cash as of June 1st and that some obligations will be unable to be paid after that day. Some stress in financial markets currently at hand might substantially escalate further if a deal is not found.
• Kevin McCarthy concluded the talks on Wednesday with no deal, but good progress.
• FOMC Minutes underlined again that the Fed remains data-dependent with cuts unlikely while inflation is still unacceptably high.
• Fitch issued a negative outlook for its AAAu credit rating of the United States. 
• US Credit Default Swaps (CDS) jumped higher for a third day in a row and are nearing the peak of last Wednesday.
• US equity futures are mixed with Nvidia (NVDA) keeping the Nasdaq in the green. 
• The CME Group FedWatch Tool shows that markets are pricing in a 50% chance of rate hike for July after hawkish comments from Federal Reserve officials Jim Bullard and Neal Kashkari. Rate cuts have moved down the line to as early as November 2023. 
• The benchmark 10-year US Treasury bond yield trades at 3.75% and flirts with another two-month high after as it is set to take out the high of Tuesday. 

US Dollar Index technical analysis: risk-off flow supports DXY

The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.43 and 102.85 on the upside. The safe haven status keeps seeing bids for the DXY with 104 having been broken early on Thursday, during the European trading session. The next target becomes 105. 

On the upside, 105.74 (200-day SMA) still acts as long-term price target to hit, as the next upside key level for the US Dollar Index is at 104.00 (psychological, static level), and acts as an intermediary element to cross the open space.

On the downside, 102.85 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 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.