Sooner or later, the US dollar will start losing value, but it is too early to sell it.
The dollar index has stabilized at the level of 103.30, supported by growing expectations that the Federal Reserve will maintain higher interest rates for a longer period. Also, traders are increasingly concerned that the US debt ceiling impasse remains unresolved.
In his latest comments, James Bullard allowed for the possibility of raising rates by half a point later this year. Meanwhile, Neel Kashkari believes it is necessary to pause or raise interest rates in June.
Thus, market expectations of interest rate cuts later this year have been scaled back, with rates seen holding at around 4.7% by December.
Meanwhile, US President Joe Biden and House Speaker Kevin McCarthy expressed cautious optimism that a deal to raise the debt ceiling would be reached, while Treasury Secretary Janet Yellen confirmed that the US could face a default on its debt by June 1.
The market situation is uncertain. What to do with the dollar?
Expecting a continued rise in the dollar is like shooting yourself in the foot on the way to profit. The rebound has exhausted itself, which is obvious from its current positioning.
Caution is currently justified, so it is better to wait for the most suitable moment for speculative purposes.
"The US rates market has now corrected half the fall in end-year Fed pricing that we saw as the banking crisis erupted. There may be a little more Dollar support coming from there, but not much," analysts at Societe Generale noted.
Sterling is ready to resume gains
The dollar's weakness plays into the hands of the British currency. It just needs to wait for the right moment.
Some analysts, including those at Nomura, NatWest Markets, and HSBC, expect the GBP/USD pair to advance to 1.3000 in the coming months.
Markets are pricing in another 0.5% increase in interest rates by the Bank of England this year, with a hike of 0.25% by the Federal Reserve at most. In this scenario, the pound sterling is likely to continue strengthening against the dollar until the end of this year and even into 2024.
In the meantime, it is trading downwards
On Tuesday, the British pound fell against the euro and the dollar. Data shows that the UK's economic growth is still concentrated in the services sector.
The S&P Global Services Purchasing Managers' Index (PMI) slid to 55.1 in May from 55.9 a month earlier, below the market consensus of 55.5. Growing economic uncertainty and higher borrowing costs were among the reasons cited as obstacles to growth.
Manufacturing activity also declined. The index fell to 46.9 in May from 47.8 in April, below analysts' forecast of 48. The latest data indicated the sharpest deterioration in the manufacturing sector in five months as output declined for the third consecutive period.
Employment in the private sector increased in May for the second consecutive month, but the job creation rate remained modest and noticeably weaker than on average in 2022.
Additional staff hiring reflects rising business requirements, especially in the services sector, and renewed recruitment efforts amid improved candidate availability.
Meanwhile, new work across the private sector increased at the slowest pace since February.
The data suggests that the UK economy will continue to expand at a weak pace in the coming months, raising questions for currency analysts and traders about the British pound's further movement. Perhaps its bullish run has been completed at this point.
Disappointing reports could put pressure on the currency in the coming weeks.
The pound sterling decreased by 0.40% to 1.2388 against the greenback after statistics were released.
From a technical point of view, the outlook is as follows: the GBP/USD pair has moved away from the 1.2470 mark, which reinforces expectations of a downward move towards 1.2345 and 1.2240. It is important that the price stay firm below the resistance area of 1.2470.