Forex Today: US Dollar Holds Firm Despite Improving Risk Appetite

Here’s what you need to know for next week:

The Dollar Index (DXY) rises for the second week in a row despite improving market sentiment. The debt ceiling drama will continue as the deadline approaches, and while there is hope of a deal, it has yet to be reached. The banking sector remains in the spotlight, especially after Treasury Secretary Yellen’s comments on Friday. Next week, the market will learn how the global economy performs with the preliminary PMI for May, which will likely weigh on sentiment.

Treasury yields rose strongly during the week, hitting monthly highs. Market Participants cut their bets on the Federal Reserve (Fed) rate cuts. On Wednesday, the Fed will release the minutes of its latest Federal Open Market Committee (FOMC) meeting. The key report in the United States will be on Friday, with the basic personal consumption price index. This indicator of inflation will be crucial for the next Fed meeting and decisive for the markets.

The EUR/USD pair closed the week around the 20-week SMA near 1.0800. The short-term bias is to the downside, with the price dipping below the key daily SMAs. The hard-line speech of the heads of the European Central Bank (ECB) did not serve to support the euro.

Rabobank analysts wrote:

In our view, the market will continue to discount expectations of a Fed rate cut for 2023, which should further support the dollar in the coming months. At the same time, we continue to think that long EUR positions will be cut as the Eurozone faces the risk of stagnation in the second half of this year. We continue to believe that EUR/USD will head for 1.06 in the second half of 2023.

GBP/USD ended the week hovering around 1.2450, the same level it was a week ago. The pair continues to move with a bearish bias. Next week the UK will report inflation and the CPI annual rate is expected to rise from 1.0% to 1.4%, adding further pressure on the Bank of England.

The Japanese Yen was one of the biggest losers despite the rally on Friday. Rising US and European government bond yields and improving market sentiment boosted the USD/JPY above 138.00, a level not seen since November 2022. Inflation in Japan unexpectedly picked up in April, as measured by the national CPI. The Tokyo CPI will be published on Friday.

The AUD/USD pair ended the week flat, after testing the 0.6600 level following the Reserve Bank of Australia (RBA) minutes and employment figures. The Australian dollar lagged, and the AUD/NZD pair posted the lowest close since December.

The NZD/USD pair erased last week’s losses and rallied towards 0.6300, breaking above the 20-week SMA again. The kiwi was one of the most bullish values ​​of the week. On Wednesday, the Reserve Bank of New Zealand (RBNZ) will announce its monetary policy decision, with a 25 basis point rate hike expected.

Analysts at TD Secutiries commented:

After the surprise 50 basis point rise in April, we do not expect another 50 basis point surprise after the softer first quarter CPI data. However, we acknowledge the risk of one as the budget update shows a stronger fiscal boost across the economy since the cyclone rebuild. The focus is on the new OCR pathway and a terminal rate hike will lead markets to anticipate further hikes.

USD/CAD continues to move sideways between 1.33 and 1.36 and is about to record another weekly close near the 20-week SMA at 1.3500. The Loonie outperformed on the back of higher-than-expected Canadian inflation data. Although the market does not expect a rate hike from the Bank of Canada, rate cuts for the end of the year have been ruled out.

Gold fell significantly but finished off the lows, offering hope to the bulls. The XAU/USD pair found support at $1,950 and bounced towards $1,980 following Powell’s comments on Friday. Silver posted modest weekly losses, finding support at the 20-week SMA.