DXY Forecast: US Debt Ceiling and NFP to Play Key Roles
US Dollar Playbook
DERBYSHIRE GB / May 29 - This is the US Dollar Forex Playbook and is intended to be used as a guide to aid in your trade planning.
Economic Snapshot
The economy of the United States can be characterised as slightly optimistic improvement meaning that improvement is likely at slightly better levels than previously expected.
The FOMC decided to raise the federal funds rate by 0.25% on the 3rd of May 2023, to a range of 5.00% to 5.25%. The next meeting is on Wednesday the 26th of July.
The Federal Open Market Committee‘s May statement contained mixed sentiment and a cautious approach to monetary policy.
The outlook for growth remains uncertain, but it can be characterised as optimistic improvement. The Q1 2023 final report is due on Thursday the 29th of June.
The outlook for CPI can be characterised as a slightly optimistic improvement. The April report is due on Wednesday the 21st of June.
The outlook for unemployment can be characterised as a slightly optimistic deterioration. The May report is due on Friday the 2nd of June.
Previous Three Months
The US dollar reached a high close to 106 in March following Fed Chair Powell’s comments on interest rates. However, the Silicon Valley Bank collapse weakened the dollar as investors theorised that the Fed would need to cut rates.
In May, Treasury Secretary Yellen's warning of a US debt default weakened the dollar, but it has since strengthened as talks progress towards a deal.
Previous Three Weeks
The value of the US dollar has been strengthening in recent weeks. After reaching a low near 101 in the second week of May, the value has since climbed to the 104 area. This can be attributed to improved sentiment regarding the debt ceiling.
Short Term Outlook
Strength in the US dollar has been held back by the ‘2023 US Debt Ceiling’ narrative although as a deal is close it is expected that markets will move on to the next narrative which could be the labour situation. If the labour market continues to slow as expected then the dollar may give back some of the recent gains although moves higher are possible if there is any upside.
The CME Group 30-Day Fed Fund futures prices indicate that the odds are in favour although falling (60% prev. 65%) of a 0.25% hike in June. The July meeting is being priced in as a hold (50% and rising).
The events to keep an eye on:
June 2nd: US NFP, Unemployment
June 9th: US Treasury Currency Report
The short term forecast for the DXY is to remain above the 50 day moving average of 102 unless the ‘2023 US Debt Ceiling’ crisis goes unresolved or the NFP comes in a lot lower than expected.
Gavin Pearson
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Specialises in forex G7 currencies
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