Dollar Gains as June Hike Probability Increases and Debt Ceiling Fears Fade: XM.com

Written by Charalampos Pissouros, Senior Investment Analyst at XM.com. An original of this article can be read here.

The dollar continued to strengthen against almost all the other major currencies on Thursday, although it seems to be taking a breather today.

The greenback climbed to seven-week highs helped by more headlines about the US debt-ceiling stalemate that said President Biden and House Speaker McCarthy are hoping to reach common ground after Biden returns from the G7 summit in Japan this Sunday.

But apart from the optimistic tone on debt-ceiling talks, what made it easier for traders to add to their 'long' dollar positions may have been another round of encouraging data and hawkish rhetoric by a few more Fed officials.

Data for last week showed that fewer Americans filed initial jobless claims, which combined with hawkish remarks by Dallas and St Louis Fed Presidents Lorie Logan and James Bullard, allowed market participants to further scale back their rate cut bets.

Both policymakers argued that inflation is not cooling at a pace that could warrant a pause. In other words, besides Mester, we have two more names in favour of a June hike.

Above: GBPUSD at daily intervals.

Among the three though, only Logan is a voting member this year. Thus, traders may need to hear from more voters before they arrive at safer conclusions about what may happen in June.

According to Fed funds futures, investors have lifted the probability of a 25bps hike at the upcoming gathering to 33%, while they are seeing only 45bps worth of rate reductions by the end of the year.

More upbeat data and more hawkish rhetoric by the Fed could keep the dollar supported for longer. However, a full-scale reversal may be too premature to be put on the table.

Usually, debt-ceiling agreements are reached at the 11th hour, which leaves room for disappointment in the next couple of weeks, while not all Fed officials are of the opinion that another hike is the wiser choice.

Board Governor and Vice Chair nominee Philip Jefferson yesterday said that it is too early for the full impact of the prior rate increases to be fully felt by the economy, which implies that he may be thinking to vote for no action.

Today, investors may pay extra close attention to a speech by Chair Powell, as they are eager to listen to his updated views in light of the latest improvement in the data and after the Fed’s own loan survey eased fears of a potential credit crunch.

A reversal in the greenback appears premature from a technical point of view as well. Yes, the dollar index has started climbing north after the bears failed several times to break the 100.70 zone, suggesting that a double bottom may be in the works.

However, the formation is not completed yet, which gives to the recovery the characteristics of a correction or of a consolidation phase start.

Completion and reversal could be signalled upon a break above the 105.50 hurdle, which marks the neckline of the double bottom.

Wall Street extended its gains yesterday, with all three of its main indices ending another session in the green. Despite market participants scaling back their rate cut bets, they seem willing to stay in the equity market and celebrate the prospect of avoiding a recession due to improving data and the willingness of Congress officials to avert a government shutdown.

The tech-heavy Nasdaq extended its rally above the high of last August at 13,720, which suggests that further advances towards the peak of April 20, 2022, at 14,300 are possible.

The S&P 500 emerged and closed well above the key resistance (now turned into support) zone of 4,150, which is also a bullish sign, which may allow a test at 4,325 in the foreseeable future.