US Dollar Index: Debt ceiling woes, bank fears favor DXY bulls near 102.00, more US inflation clues eyed

• US Dollar Index marked two-day winning streak to eye first weekly gain in three, grinds higher of late.
• Sour sentiment, hawkish Fed talks underpins US Dollar demand despite mixed statistics.
• US CPI, PPI came in unimpressive, Jobless Claims jumps to the highest since October 2021.
• US Michigan Consumer Sentiment Index, UoM Consumer Inflation Expectations eyed for clear directions, risk catalysts are the key.

US Dollar Index (DXY) grinds higher past 102.00 as the greenback bulls brace for the first weekly gain in three during early Friday. In doing so, the US Dollar’s gauge versus the six major currencies pays little heed to the mixed US data while cheering the hawkish Federal Reserve (Fed) signals and sour sentiment.

The market’s rush toward the US Dollar can be linked to the fears of the US debt ceiling expiry and banking fallouts.

Among the latest negatives on the matter is the postponement of the debt ceiling talks between US President Joe Biden and House Speaker McCarthy. The news becomes all the more important and negatively impacts the risk appetite as the US Treasury Department has already signaled the Federal Government’s likely default as soon as June 1 unless the debt ceiling is raised. Also increasing the intensity of the news is the fact that US President Biden is set to attend the G7 meeting in Japan the next week.

It should be noted that Politico came out with the news suggesting that US Treasury Secretary Janet Yellen will discuss the impasse over raising the government debt ceiling with board members of the Bank Policy Institute lobby group, including the CEOs of JPMorgan and Citigroup next week

On Thursday, US Treasury Secretary Yellen reiterated her warning that the “US default would threaten US recovery, sparking a global downturn that would set us back much further.” On the same line was Beth Hammack, Chair of the Treasury Borrowing Advisory Committee and Co-Head of Goldman's Global Financing Group, who said recently that a political deadlock over the US debt ceiling poses a "real risk" for the USD. 

Talking about the bank fears, Reuters said that around 113 of the largest U.S. lenders will bear the cost of replenishing a deposit insurance fund that was drained of $16 billion by recent bank failures, per the Federal Deposit Insurance Corporation (FDIC), which in turn escalate fears of more fallouts in the banking industry.

After a softer US Consumer Price Index (CPI), the Producer Price Index (PPI) improved to 0.2% MoM for April versus 0.3% expected and -0.4% prior. More importantly, PPI ex Food & Energy, known as Core PPI, rose on MoM but eased on YoY. Further, US Initial Jobless Claims rose by 264,000 to push the level to the highest level since October 2021, which in turn escalated the risk-off mood and favored the US Dollar.

However, Minneapolis Fed President Neel Kashkari mentioned on Thursday that inflation has eased but warned it is above the Fed's 2% target while speaking at the Marquette CEO Town Hall in Michigan. 

Against this backdrop, Wall Street edged lower whereas the US 10-year and two-year  Treasury bond yields also dropped in the last two consecutive days.

Looking ahead, the DXY traders may seek more clues to defend the latest run-up, which in turn highlights updates on the US debt ceiling and banking fronts. Additionally important will be the preliminary readings of the University of Michigan’s (UoM) Consumer Sentiment Index (CSI) for May, as well as the UoM 5-year Consumer Inflation Expectations for the said month.

Also read: Michigan Consumer Sentiment Index Preview: Modest improvement not enough to boost the mood

Technical analysis

Although a daily closing beyond the 21-DMA, around 101.70 by the press time, favors the US Dollar Index (DXY) buyers, a downward-sloping resistance line from early April, close to 102.22 at the latest, restricts short-term upside of the greenback’s gauge versus six major currencies.