The US dollar index (DXY) continued its sideways movement in the mid-range area between 101.00-102.00, while major pairs fluctuated limited.

The US dollar index (DXY) continued its sideways movement at the midpoint between 101.00-102.00 in Wednesday's trading, while major currency pairs fluctuated within limited ranges. The release of US inflation data reinforced speculation that the Fed's interest hike last week would be the final this year, putting pressure on the US dollar. On the other hand, the US debt ceiling issue prevented a sharper weakening of the US dollar.

dxyDXY Daily chart via TradingView

Growth in core inflation data and inflation data for all goods and services in the US increased by 0.4% (month-over-month) in April 2023, in line with market expectations. The annualized pace of core inflation corrected from 5.6% to 5.5%, while inflation for all goods fell from 5.0% to 4.9%. 

The overall data indicate that inflationary pressures are weakening. The impact of the Fed's tight monetary policy since last year is becoming more widespread in the economy, making it unlikely that the US central bank will need to raise interest rates again.

"Today's data was in line with expectations and does not change our view that the Fed has now paused its interest rate hikes, but the still hot pace in core inflation also reaffirms that rate cuts are not in the cards for this year," says Karyne Charbonneau, an economist at CIBC Capital Markets. 

The market initially responded to the US inflation data announcement by boosting Wall Street stocks and selling off the US dollar. US Treasury bond yields also slipped slightly. However, market movements soon moderated again as the US debt ceiling issue continued to heat up. 

President Joe Biden and the US political elite have not reached an agreement to raise the government debt ceiling in negotiations earlier this week. Democrats want the debt ceiling raised, but Republicans are unwilling to agree to it before agreement on several other crucial issues. 

If an agreement on the US debt ceiling is not reached by the deadline on June 1, the US will default and global financial markets could be shaken. This risk creates market jitters, which support the US dollar in the short term.

In the middle of the New York session, EUR/USD and AUD/USD continued sideways below the 1.1000 and 0.6800 thresholds, respectively. GBP/USD printed another one-year high but lacked the energy to rally amid uncertainty ahead of tomorrow's Bank of England meeting.