US Dollar Shines on Signs of Resilient Economy and Debt Ceiling Resolution

May 21, 2023
US Dollar Shines on Signs of Resilient Economy and Debt Ceiling Resolution May 21, 2023 Lennox Hamilton

Amid a global improvement in investor sentiment, the British Pound remained above 1.15 against the Euro and recovered from previous losses against the US Dollar, as investors rebalanced their portfolios in anticipation of the weekend. It is anticipated that the Greenback will register a back-to-back weekly upsurge in comparison to the two Euro currencies, in line with its general superior performance.

According to W. Brad Bechtel, who serves as the Global Head of FX at Jefferies LLC, today is known as “reversal Friday.” This is the day when trades that were successful throughout the week experience a decline in performance, as market participants opt to take profits and minimize risk ahead of the weekend. The European currencies experienced an upswing in response to a boost in sentiment, which was fueled by the impressive weekly gains of regional stock markets. Additionally, the climb of U.S. equities also contributed to this positive trend, as it indicated that U.S. leaders were making progress towards reaching a new fiscal settlement.

The cautious optimism surrounding an agreement to increase America’s borrowing limit has tempered the U.S. dollar’s rise to two-month highs. According to Joe Manimbo, who is a Senior Currency Analyst at Western Union, the dollar is positioned for a second consecutive weekly gain. It is currently hovering near three- and seven-week highs against the British pound and the euro, respectively. Additionally, it is still within striking distance of six-month highs against the yen.

According to Kevin McCarthy, the Republican House Speaker, there is a possibility of voting on a measure to increase the US debt ceiling in the upcoming week. This development has raised hopes that the White House and Congress will come to a consensus to prevent a default on June 1. The current month of May is demonstrating a notable outperformance of the Dollar, as investors reevaluate their projections regarding the expected number of rate hikes by the Federal Reserve.

Due to the recent sturdy data, investors have been purchasing Dollars, resulting in speculations of another hike in June. According to Manimbo, the US dollar has experienced a significant increase in strength in the past few weeks. This is due to the alignment of indicators pointing towards a strong US economy and the hawkish remarks made by Federal Reserve officials.
The resurgence of the Dollar has exerted a more pronounced influence on the Euro as compared to the Pound, thereby sustaining the GBP/EUR exchange rate above the 1.15 threshold. At the time of writing, the GBPUSD experienced a 1% decline to 1.2432 in May, whereas the EURUSD observed a 2.0% increase to 1.0794.

The performance of the Dollar in the coming days could significantly impact the rest of the month. If the current rally continues, it may exert downward pressure on the GBP/USD exchange rate. However, based on recent trends, it is possible that this could provide support for the GBP/EUR exchange rate. Possible professional rewriting: The depreciation of the US dollar may lead to a relatively stronger performance of the euro against the pound, which could exert downward pressure on the pound-euro exchange rate, possibly pushing it below the level of 1.15.

The foreign currencies that are more sensitive to risk have not yet been influenced by the positive outlook regarding the U.S. debt agreement. Therefore, it is my anticipation that the dollar will experience further depreciation. As per the analysis of Fawad Razaqzad, an analyst at City Index, the current surge in the global equity markets suggests that investors are positive about the ongoing US debt ceiling negotiations and are not perturbed by the economic slowdown in China.

During the upcoming week, the British Pound’s trading will be influenced by more idiosyncratic factors. This is due to the release of PMI figures for May on Tuesday and the highly significant CPI inflation report on Thursday. Headline It is expected that the annual inflation rate will decrease from 10.1% in April to 8.3%. In the event that inflation meets or exceeds projections, there is a possibility for the Pound to appreciate. This is due to the increased probability of a 25 basis point rate hike by the Bank of England on June 22.

On the other hand, if there is an underperformance, it could lead to a decrease in these expectations. This may have an impact on the exchange rates of Sterling in a broader sense and could signify another week of consecutive losses against the Dollar. It is anticipated that the pound will receive substantial backing from enhanced data and the exclusion of political tensions. As per UBS strategist Thomas Flury, it is advisable to utilize any unforeseen declines below 1.23 for initiating long positions in GBPUSD.

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