The rally of the US dollar was supported by signs of recovery in the ISM Manufacturing PMI data released yesterday.

The US dollar has risen ahead of the May FOMC meeting, with the DXY index posting consecutive gains since last week and reaching around 102.25 in trading on Tuesday, May 2nd. The rally is supported by several recent releases of US economic data and the resolution of a bailout plan for troubled local banks.

dxyDXY Daily chart via TradingView

The market received a positive surprise from the Purchasing Managers' Index (PMI) data for the US manufacturing sector in trading on May Day yesterday. The ISM report showed an increase in the US manufacturing PMI score from 46.3 to 47.1 in April 2023, or better than the consensus estimate of only 46.8.

A PMI figure below 50.0 still indicates contraction, but the details in the report depict signs of recovery in all sub-indexes. The price and employment sub-indexes have even returned above the 50.0 thresholds, indicating the resilience of inflation pressures and the tight labor market in the US manufacturing sector.

"The U.S. manufacturing sector contracted again; however, the Manufacturing PMI® improved compared to the previous month, indicating slower contraction. The April composite index reading reflects companies continuing to manage outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period," issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee.

In yesterday's New York session, the US dollar rose sharply against all major currency pairs. It weakened against Antipodean currencies today following the RBA's surprise interest rate hike, but the USD continued to pressure the euro and sterling.

As the FOMC meeting on May 2-3, 2023, approaches, the performance of US economic data has stabilized market expectations for a 25 basis point Fed rate hike. JP Morgan's takeover of First Republic Bank has also reassured the market that the Fed can make its interest rate decision tomorrow without worrying about its impact on banking system stability.