What factors are contributing to the renewed strength of the US dollar?

The U.S. dollar experienced a slight decline but maintained its position near a two-month high. This was influenced by positive labour data and a hopeful outlook that the United States would avoid a debt default, indicating that the Federal Reserve would continue implementing a strict monetary policy for a longer period. The dollar index is anticipated to achieve gains of just under 1% for the week due to news of productive negotiations to resolve the ongoing debt ceiling stalemate in Washington. This development has boosted optimism that an agreement will be reached, preventing a harmful debt default. As a result, the focus has shifted back to the Federal Reserve and its decision-making process regarding future interest rate adjustments. Concerns about the country's banking sector seem to have diminished, and recent inflation data has remained steady. 

This development has prompted various Federal Reserve officials to express concerns that U.S. inflation has not cooled down quickly enough to enable a pause in the rate hike cycle scheduled for June. Chair Jerome Powell is expected to address these matters in a speech later on Friday. Based on the prices of Fed fund futures, there is a 33% probability that the Federal Reserve will raise rates by another 25 basis points next month, compared to only about a 10% likelihood a week ago. The EUR/USD currency pair rose by 0.1% to 1.0781, recovering from the previous session's seven-week low. The GBP/USD currency pair rose by 0.1% to 1.2417, recovering slightly from its struggle against overnight strength in the U.S. dollar. Bank of England policymaker Jonathan Haskel is scheduled to speak later in the session and could provide support for the British pound if he confirms that the recent rate increase was not the last one, citing the tight labour market and persistently high inflation as reasons for further adjustments.

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