US Dollar gains back earlier losses as PCE data confirms sticky inflation and US yield curve repriced higher

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  • US Dollar is moving back to its earlier levels against most currencies after PCE Core Deflator came out higher as previous month and above expectations. 
  • US debt-ceiling talks continue into Friday, Biden mentions possible spending freeze and denies default while a deal is taking shape.
  • US Dollar Index pops back above 104 as recent data reprices more rate hikes to come from the Fed.

The US Dollar (USD) is picking up steam again at the start of the US trading session on the back of a batch of strong US data, while traders are hearing signals out of Washington that a plan on the debt ceiling is taking form. The strong US data points confirm the stance of the Fed that inflation remains sticky and possibly another rate hike is acceptable. US President Joe Biden gave more details on Thursday night about the debt talks and reiterated that there will be no default on his watch. 

On the macroeconomic data front,  the Personal Consumption Expenditure (PCE) inflation numbers came out above estimates with most important: the PCE Core Delfator MoM at 0.4% against the previous 0.3% and the YoY at 4.7% against the previous 4.6%. The Fed is right to remain vigilant in terms of sticky inflation as Personal Spending for April jumped from previous 0.0% to 0.8%. The CME Fedwatch tool now prices in a 102% probability for a July hike with only just one rate cut left for this year. This is a seismic shift against the odds from last week with three rate cuts and no hikes at all priced in for the rest of the year. 

Traders are not done yet for this Friday with the University of Michigan expectations and inflation expectations still due at 14:00 GMT. ALthough these are final readings for May, it can still move the needle further in favor of a stronger US Dollar. Should inflation expectations head higher as well, expect to see the DXY consolidate above 104 and see the Greenback print several session’s or weekly highs against some G10 currencies. 

Daily digest: US Dollar to close out the week on a high note

  • PCE Deflator MoM at 0.4% against 0.1% previous / YoY at 4.4% against 4.2% previous. The core PCE stands at 0.4% against 0.3% previous / YoY at 4.7% against 4.6%.
  • US people are spending with Personal Spending at 0.8% against 0.0% previous, while Personal Income increased a touch to 0.4% from 0.3%.
  • Durable Goods Orders dropped from 3.2% to 1.1% with an upward revision to 3.3% for the previous number / Ex. Transportation shrunk from 0.2% to -0.2% with an upward revision for the previous number to 0.3%. 
  • the US Yield curve is repricing on the back of the recent data and heads higher in terms of rates overall on the curve. 
  • US equity futures are mildly in the green after a subdued start this Friday, while the Chinese Hang Seng Index closed nearly 2% lower and sees Europe looking for direction still. 
  • The CME Group FedWatch Tool shows that markets are pricing in a 102% chance of rate hike for July and even June is now at a 57% chance for a hike. A big shift is being noticed ats well for the September expectations: A  rate cut expectation has been turned into a 85% possibility of a rate hike. 
  • US President Joe Biden commented after the last debt-ceiling meeting that a proposal is on the table for a spending freeze for two years, and reiterated again there will be no default. Meanwhile GOP debt negotiators gave ground on defence spending demands. 
  • Negotiator Garret Graves said that finding a debt-limit deal this Friday will be hard. 
  • US Credit Default Swaps (CDS) eases a touch to 163.875 after peaking at 165.83 on Thursday. The peak was last week on Monday at 177.62 when concerns for a default were at the highest. 
  • Fitch places Fannie Mae and Freddie Mac ratings on watch. 
  • US Treasury Cash balance dropped to $49.5 billion on Wednesday. 
  • The benchmark 10-year US Treasury bond yield trades at 3.79% and are holding at that level after briefly hitting 3.82%, awaiting further guidance from the data later this Friday. 

US Dollar Index technical analysis: USD to lock-in 104 before the weekend

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 US Dollar safe-haven status keeps seeing bids for the DXY, with 104 having been broken early on Thursday and now eases a touch as a debt-ceiling deal takes some shape. 

On the upside, 105.73 (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. 

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If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

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Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.