US Dollar clings to daily gains, eyes on House debate and vote on debt limit deal

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• US Dollar has regathered its strength mid-week amid risk aversion.
• US Dollar Index reached its highest level in over two months above 104.50 on Wednesday.
• US debt-limit bill advanced to House floor for a debate and a vote.

The US Dollar (USD) has started to gather strength against its major rivals mid-week amid a negative shift witnessed in risk perception following Tuesday’s uninspiring performance. The US Dollar Index, which tracks the USD’s valuation against a basket of six major currencies, turned north early Wednesday and reached its highest level since mid-March above 104.50 before retreating modestly.

The USD’s performance is likely to continue to be impacted by risk perception in the second half of the day with investors keeping a close eye on headlines surrounding the debt-limit bill.

On Tuesday, the House Rules Committee advanced the debt-ceiling bill to the House by an uncomfortably close vote of 7 to 6, causing investors to adopt a cautious stance. Several Republican lawmakers voiced their oppositions against the bill, which will be debated in the House floor and voted on Wednesday before moving to a final Senate vote.

Daily digest market movers: US Dollar benefits from risk aversion

• Reflecting the risk-averse market atmosphere, Wall Street’s main indexes opened in negative territory on Wednesday. As of writing, the Dow Jones Industrial Average and the Nasdaq Composite indexes were both losing around 0.5% on the day.
• In an interview with the Financial Times, Cleveland Federal Reserve (Fed) Bank President Loretta Mester said that she doesn’t necessarily see a compelling reason for pausing rate increases amid a “really embedded, stubborn inflationary pressure.”
• The benchmark 10-year US Treasury bond yield continues to push lower on Wednesday and was last seen losing more than 1% on a daily basis below 3.7%. Nevertheless, the CME Group FedWatch Tool shows that markets are pricing in a nearly 70% probability of the Fed raising its policy rate by 25 basis points (bps) in June.
• The US Bureau of Labor Statistics will release the JOLTS Job Openings data for April on Wednesday. On Thursday, the ADP’s private sector employment report and the ISM’s Manufacturing PMI survey will be featured in the US economic docket.
• Previewing the ADP data, “not only have ADP’s figures jumped from miss to beat and the other way around, but these differences have also been significant, especially in recent months,” said FXStreet Analyst Yohay Elam. “After leaping to the highest level since July 2022 in the latest April publication, the upcoming May report could be weak.”
• Consumer sentiment in the US weakened slightly in May with the Conference Board’s (CB) Consumer Confidence Index edging lower to 102.3 from 103.7 in April (revised from 101.3). The Present Situation Index declined to 148.6 from 151.8 and the Consumer Expectations Index stayed virtually unchanged at 71.5. Finally, the one-year consumer inflation expectations ticked down to 6.1% in May from 6.2% in April.
• House prices in the US rose by 0.6% on a monthly basis in March, the monthly data published by the US Federal Housing Finance Agency showed on Tuesday. This reading followed February’s increase of 0.7% (revised from 0.5%) and came in better than the market expectation of +0.2%.
• On Sunday, US President Joe Biden and Republican House Speaker Kevin McCarthy reached an agreement to temporarily suspend the debt-limit to avoid a US debt default. The House of Representatives and Senate still need to approve the deal, which will suspend the $31.4 trillion debt-ceiling until January 1, 2025, in coming days. 
• The US Bureau of Economic Analysis (BEA) reported on Friday that inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, rose to 4.4% on a yearly basis in April from 4.2% in March.
• The annual Core PCE Price Index, the Fed’s preferred gauge of inflation, edged higher to 4.6%, compared to the market expectation of 4.6%. 
• Further details of the BEA’s publication showed that Personal Income increased 0.4% on a monthly basis while Personal Spending rose 0.8%.

Technical analysis: US Dollar Index bullish bias stays intact above key level 

The US Dollar Index (DXY) managed to close above the key technical level of 104.00 (Fibonacci 23.6% retracement of the November-February downtrend) on Tuesday, reflecting buyers’ willingness to defend that support. In case the DXY starts using 104.50 (static level) as support, it could target 105.00 (psychological level, static level) and 105.60 (200-day SMA, Fibonacci 38.2% retracement) next.

On the downside, 104.00 stays intact as key support. A daily close below that level could attract USD sellers and open the door for an extended slide toward 103.00, where the 100-day Simple Moving Average (SMA) is located.

It’s also worth noting that the Relative Strength Index (RSI) indicator on the daily chart stays near 70, suggesting that the DXY could correct lower in the short term before the next leg higher.