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CFDs are complex instruments. 71% of retail client accounts lose money when trading CFDs, with this investment provider. You can lose your money rapidly due to leverage. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money.

A little less conversation, a little more action: Markets demand progress amid US debt ceiling stalemate

The DXY is on the rise amidst ongoing debt ceiling negotiations; the Euro Area faces its own economic woes, further propelling the USD's value and China's slowdown fears are adding to the increasing support for the USD.

Source: Bloomberg

Impasse in debt ceiling negotiations

Last week’s optimism towards a debt ceiling deal faded overnight as another day of talks failed to deliver progress towards an agreement.

While US President Joe Biden and House Speaker McCarthy have projected optimism and agreed that default is not an option, the market is now at the point where it wants a little less conversation, a little more action.

Market reaction and dollar rise amid global economic concerns

Specifically, the continued impasse is now viewed as bad news and overnight generated a traditional risk-off response of lower equities and a higher US dollar. Although we hasten to add, it’s not just the debt ceiling debacle and risk aversion that is driving the US dollar higher.

The US dollar index (DXY) includes a 57% weighting of the euro. Earlier this month, the first cracks in the Euro Area growth story emerged as Euro Area industrial production fell by 4.1% m/m, the steepest drop since March 2020.

The cracks deepened overnight as the Euro Area Manufacturing PMI fell to 44.6 in May, which, apart from the Covid pandemic in early 2020, was the weakest since July 2012.

Impact of China's slowdown on the US dollar

The US dollar is also receiving support from China slow down concerns. USD/CNY closed yesterday at its highest level since December. The Chinese currency, the yuan, has now given back all its gains and more since the China re-opening in early December.

Should the slowdown in China and the Euro Area deepen, the anti-cyclical US dollar will continue to rise in the medium term.

Short-term prospects of US dollar: Focus on FOMC meeting

Looking ahead in the short term, aside from the impacts of the debt ceiling discussions, the US dollar's upward trajectory hinges on the forthcoming disclosure of the Federal Open Market Committee (FOMC) meeting minutes.

Market participants are keenly interested in understanding the specifics that could prompt a hold or even a further tightening in monetary policy. Equally important is the committee's perspective on the Senior Loan Officer Opinion Survey (SLOOS) data.

Another critical factor to consider is whether the Federal Reserve staff's expectation of a modest recession for this year is still valid.

DXY technical analysis

In 2023, the US dollar index, the DXY, tested and held support at 101.00/80 on three separate occasions, providing evidence of a base.

After an encouraging rally in May, the DXY is now eyeballing downtrend resistance at 104.00, coming from the September 114.78 high.

While it would be highly unusual to see a clean break of a significant technical level on the first attempt in these types of finicky markets, a sustained break of 104 would likely be the catalyst for the DXY to extend its rally towards significant resistance at 105.80/106.00 coming from the March 105.88 high and the 200-day moving average.

DXY daily chart

Source: TradingView

EUR/USD technical analysis

In our last update on the EUR/USD in early May here, we noted the struggle that the EUR/USD was having with monthly resistance at 1.1075/95ish coming from October 2000 .8231 low.

Furthermore, a break of uptrend support at 1.0990/80 would indicate that a corrective pullback was underway towards 1.0800.

With the bit between its teeth and EA and China growth concerns rising and after reaching the 1.0800 level noted above, the market will likely set its sights on the March 1.0516 low in the sessions ahead.

EUR/USD daily chart

Source: TradingView
  1. TradingView: the figures stated are as of April 24, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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