The USD held its gains on Friday near its two-months peak reached in the previous session, hovering mid 103 levels. Growing optimism from the debt ceiling negotiations and a hawkish stance by the Federal Reserve are supporting the greenback ahead of the highly anticipated speech of Fed Chair Jerome Powell today.
USD on track for second consecutive weekly gain
The US Dollar rose on Thursday for the third consecutive day, despite the risk appetite. Hawkish remarks from the Federal Reserve officials referred to a potential 25 basis point rate hike in June.
The US Dollar Index (DXY), which gauges the dollar’s strength against six major currencies, is slightly down on the day at 103.45, a few pips away from its highest levels since March at 103.62.
The greenback has increased by nearly 0.8% over the week and is now on course to experience a second consecutive week of gains.
Constructive talks to resolve the debt ceiling impasse in Washington have increased optimism that a deal can be made to prevent a potential debt default.
According to House Speaker Kevin McCarthy, a possible agreement to increase the US debt ceiling might be finalized next week. This news has spurred positive outlooks from investors who hope to avoid a default scenario.
With debt concerns cooling down, attention is now shifted towards the Federal Reserve and its future decisions regarding interest rates.
Market Overview
The EUR/USD pair has increased by 0.15% to 1.07852 after hitting a seven-week low in the last session. This rise can be attributed to better-than-anticipated German producer prices for April. Additionally, the single currency has gained support from the prediction of additional interest rate hikes by the European Central Bank (ECB).
Peter Kazimir, a policymaker at the European Central Bank, has proposed prolonging interest rate hikes to better control inflationary pressures.
The NZD/USD increased by 0.7% to $0.6269, after dropping to as low as $0.6200 in the previous session. The increase puts the currency pair on track for a 0.4% gain for the week. This rise was supported by indicators of a strong economic recovery due to increased tourism activity and more government spending.
The AUD/USD reversed yesterday’s losses following weaker-than-expected employment figures, gaining 0.54% at 0.66539. The latest data suggests that the Reserve Bank of Australia may pause raising interest rates next month. The country’s unemployment rate rose unexpectedly to 3.7%, while market forecasts had predicted it to remain steady at 50-year lows of 3.5%.
The Japanese yen paused its recent decline on stronger-than-expected inflation data, steading around $138.13 on Friday.
Japan’s headline inflation rate increased to 3.5% in April, against market expectations of slowing down to 2.5%. The core inflation rate also rose to 3.4%, marking a three-month high and surpassing the Bank of Japan’s 2% target for the thirteenth consecutive month. Higher inflation raised hopes that the Bank of Japan (BoJ) might consider abandoning its ultra loose monetary policy to contain inflationary pressures.
Powell speech in Focus
Hawkish comments from Federal Reserve officials over the week alongside with optimism over the debt ceiling supported the USD to hit a fresh two-month high on Thursday.
Several Federal Reserve officials have expressed concerns that the rate of U.S. inflation was not decreasing quickly enough to permit the central bank to pause its rate increase cycle in June. This has led to anticipation for a speech by Chair Jerome Powell scheduled for later today for more clues.
Two Fed officials stated on Thursday that the current slowdown in US inflation might not justify a halt in increasing interest rates. Consequently, the markets predict a 40% likelihood of the Fed executing another rate hike by 25 basis points next month.
Dallas Fed President Lorie Logan said that the current data does not justify skipping an interest rate increase next month. Fed Governor Philip Jefferson stated that inflation is still too high, while St Louis Fed President James Bullard recommended raising rates as a precaution against inflation.
On the economic front, strong US jobs data suggests that the labor market is still tight, which supports the Fed’s decision to maintain its restrictive monetary policy. Thursday’s jobless claims showed a greater-than-anticipated decrease in the number of Americans filing for unemployment benefits.
Additionally, concerns about the banking industry in the country seem to have calmed down, and recent inflation data has remained consistent.
The upcoming panel discussion with Fed Chair Jerome Powell at a conference later on Friday is getting attention as investors look for further signals on monetary policy. The conference is scheduled at 18:00 GMT.
More monetary comments from New York President John Williams and FOMC member Michelle Bowman will also be watched today.
