The speech by Federal Reserve Chair Jerome Powell has dampened market expectations for further interest rate hikes in June, while negotiations on the US debt ceiling are ongoing and facing challenges.

The US Dollar Index (DXY) weakened during the New York session last Friday and opened under pressure in early trading this week (May 22). This is due to Federal Reserve Chair Jerome Powell's speech, which dampened market expectations for further interest rate hikes in June. The uncertainty surrounding the negotiations on the US debt ceiling also made market participants hesitant to push the dollar rally to higher levels.

dxyDXY Daily chart via TradingView

The hawkish speeches from several top Federal Reserve officials earlier in the week had initially led the market to anticipate another interest rate hike in June. They eliminated expectations of rate cuts this year. However, all speculations were reversed following Powell's speech ahead of the weekend.

Powell stated at a central bank conference in Washington that tighter credit conditions meant that "our policy interest rates do not have to rise by as much as they might otherwise to achieve our goals." He further emphasized that each decision would be made "meeting by meeting" based on the evolving outlook.

The content of Powell's speech reflected a neutral stance rather than being dovish or hawkish, thus failing to push the dollar further without confirmation from future economic data. Market participants are now monitoring the following speeches from Fed officials and the ongoing negotiations on the US debt ceiling.

The negotiations between US President Joe Biden and congressional leaders abruptly collapsed last week as Republican negotiators walked out. Both parties agreed to resume negotiations on Monday after reaching a phone-based ceasefire on Sunday.

Analysts expect the tug-of-war to continue until the last minute, keeping the risk of default looming. However, they remain optimistic that an agreement can be reached.

The movement of the US dollar will continue to be influenced by developments in these crucial aspects, leading to divided opinions among analysts about the short-term prospects for the dollar.

"Friday there was a bit of a setback but there's a bit more optimism after the weekend," said Francesco Pesole, FX strategist at ING, citing the phone call between Biden and McCarthy. "Markets are seeing a deal on the debt limit and at the same time the Fed pushing back on rate cuts which is ultimately proving positive for the dollar."

Sean Callow, a strategist at Westpac, holds a different view, stating, "Powell's preference to pause the rate hike in June should outweigh the hawkish views of regional Fed presidents, making DXY a sell on rallies."