The U.S. debt ceiling issue is almost resolved, and the dollar fluctuated slightly stronger this week. Some Fed officials made dovish remarks this week, which made investors lower their expectations for the Fed’s interest rate hike in June, so the dollar’s gains were curtailed. The rest of the foreign exchange market this week will focus on a series of U.S. employment-related indicators, including May non-farm payrolls data, which will significantly affect the Fed’s decision to raise interest rates at its June meeting.
Overall strength of the dollar
The U.S. dollar has strengthened slightly this week, and the U.S. dollar index has been positive for four consecutive weeks, showing strong characteristics as a whole.
The main factor affecting the foreign exchange market in the past two weeks was the hawkish remarks made by many officials of the Federal Reserve at that time, but since this week, the voices in this regard have been softer, and there are even occasional dovish remarks, so the dollar’s gains have weakened.
Fed governor and vice-chairman nominee Jefferson said on Wednesday that he is inclined to keep interest rates unchanged in June, but it does not mean that the cycle of raising interest rates is over. It just allows the Fed to have enough data to evaluate before determining the degree of policy tightening.
Jefferson was nominated by U.S. President Joe Biden to serve as the next vice chairman of the Federal Reserve in May, so his statement is relatively more concerned by the market.
As for the US debt ceiling, the issue, while important, has not had a significant impact on the dollar for weeks. Whenever the market is pessimistic about the negotiations, risk aversion rises, which actually provides some support for the dollar. At the same time, when the market is pessimistic about the negotiations, recession expectations tend to strengthen, and this puts some pressure on the dollar. Therefore, the trend of the dollar does not always fluctuate with the news of debt negotiations.
US local time on Thursday night, the US House of Representatives voted to pass the debt ceiling bill, the dollar index rose slightly, but the overall response was relatively indifferent. According to the procedure, after the House of Representatives voted to pass the bill, the bill has yet to be voted on by the Senate. If passed by the Senate, the final procedure is signed by the President.
While the news of the debt negotiations itself may not have much impact on the dollar, the market’s interpretation of the subsequent impact of the above-mentioned bills may still affect the dollar.
“Non-agricultural data” is approaching
Although the debt ceiling procedure is not yet over, there is basically no suspense, because the Senate has a high probability of passing it, and Biden is eager to sign it immediately.
When the debt ceiling is slowly forgotten by the market, the next thing will obviously immediately rise to the most important factor in the market, which is how the Fed will decide on the interest rate meeting in June.
As far as the current situation is concerned, although the probability of raising interest rates is much higher than a few weeks ago, it is still uncertain whether it will really raise interest rates. Now the market believes that the Fed’s June interest rate meeting has only about half the chance of raising interest rates, so this matter obviously has more uncertainties.
Therefore, in the short term, if some important economic indicators significantly exceed people’s expectations, then the market may be more certain that the Fed will raise interest rates or not.
This week, the United States happens to have a series of extremely important employment-related economic indicators released, so when these data are released, I believe the market will have a clearer judgment on the direction of the Fed’s interest rate.
On Wednesday, the U.S. Department of Labor announced that the number of JOLTs job vacancies in April increased to 10.1 million, better than the expected 9.38 million. The data should provide slight support for the dollar. Friday’s non-agricultural employment data has always been very important, and this time it may be even more important, because the current Fed may be more hesitant than most of the time before, and the balance is unprecedentedly swinging.
