05.06.202313:45 Forex Analysis & Reviews: USD depends on Fed's decision

The dollar has been strengthening since the opening of today's trading day. As we expected, the issue of the US debt limit was resolved. On Saturday, President Biden signed The Fiscal Responsibility Act of 2023 which suspends the enforcement of the debt ceiling until January 1, 2025. However, the limit itself will be raised from January 2, 2025. According to economists' forecasts, over the next ten years, the US debt may grow from $31.4 trillion to $52.3 trillion.

How did the US financial markets react to this? In the US government bond market, traders resumed selling off the assets, and their yields have consequently increased, pushing the dollar higher as well. It seems that investors again picked the dollar as a safe haven asset.

Buyers are also responding to the publication of the ambiguous US Labor Department report for May. According to the report, the growth of average hourly earnings slowed down from 0.4% to 0.3% (from 4.4% to 4.3% on an annual basis), and the unemployment rate rose from 3.4% to 3.7% (with a forecast of 3.5%). The data on the number of new jobs in the nonfarm sector was a positive note. There was a sharp increase of 339.0 thousand new jobs in May compared to the previous month's figure of 294.0 thousand and a forecast of 190.0 thousand. The data reflects a tight labor market, with earnings still growing, albeit at a slower pace, and unemployment remaining at historically low levels below 4%. This will likely allow the Federal Reserve to continue raising interest rates, which are already mostly higher than the interest rates of other major central banks.

Today, traders will focus on business activity in the US services sector. Economists suppose that the ISM PMI US may decline to 51.5 points in May (from 51.9 points in April), while a similar indicator from S&P Global remained at 55.1 points.

The upcoming Federal Reserve meeting will take place on June 13-14. Thus, weak ISM and S&P Global reports on business activity may force the US central bank to refrain from raising interest rates. Economists forecast that the interest rate will be maintained unchanged at 5.25. The likelihood of such an outcome is around 66.0%. However, there are many predictions of further tightening of the Federal Reserve's monetary policy. At least a strong labor market in the US allows such actions. Nevertheless, inflation remains unacceptably high, given the target level of 2%, and unemployment remains at multi-year lows.

In one of our recent reviews, we discussed the relationship between the interest rate and the unemployment rate in the US.

At the current unemployment rate below 4.0%, the interest rate can potentially reach a level of 10%. In other words, the Federal Reserve still has room for maneuver.

From a technical point of view, the DXY index has broken through the key medium-term resistance level of 103.76 (the 200-day EMA on the daily chart) and continues to develop an upward momentum towards the local 11-week high of 104.65. It also remains in the long-term bullish market zone, above the key support levels of 100.00 and 99.40 (the 200-week EMA on the weekly chart).

Only a breakout of these key support levels will affect the long-term bullish trend of the DXY.

A breakout of the local resistance level at 104.65 will strengthen the prospect of further growth for the DXY with the nearest target at local resistance levels of 105.85 and 106.00.

Support levels: 103.85, 103.76, 103.00, 102.00, 101.50, 101.00, 100.60, 100.00, 99.40, 99.00

Resistance levels: 104.65, 105.00, 105.85, 106.00, 107.00, 107.80