Markets Gripped by US Debt Ceiling Talks

Asian markets gave up earlier gains on Tuesday as investors adopted a cautious stance after US debt ceiling negotiations ended “productive talks” without a deal. However, President Joe Biden and House Speaker Kevin McCarthy both expressed optimism about reaching a breakthrough to avoid a default. European futures are pointing to a positive open ahead of the preliminary PMI figures for the eurozone in May. Wall Street closed mixed and remains influenced by the US debt ceiling developments. In the currency space, the dollar crept higher drawing strength from hawkish Federal officials while gold fell for a second day amid hints of progress towards avoiding a US default.

Big week for USD

The dollar could be injected with fresh volatility this week due to the US debt limit negotiations, Fed minutes, and top-tier US economic data.

Dollar bulls were able to draw support in the previous session from the productive US debt limit talks and hawkish comments from Fed officials. Midweek, all eyes will be on the minutes from the May FOMC meeting which could offer more clues about the central bank’s next move. After proceeding with a 25-basis point hike in May, the Fed signalled a potential pause. It will be interesting to see what the minutes show in regard to the thinking of policymakers and how united they were around the idea of 5.25% being the peak level of rates. Of course, we have heard from a slew of Fed officials since the meeting which could make the minutes relatively stale.

On the data front, much focus will be on the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure (PCE) scheduled to be released on Friday. The April PCE report is forecast to show headline prices rising 0.3% month-over-month after March’s 0.1% increase, while the core PCE deflator is projected to rise 0.3%, the same as March. The core personal consumption expenditures price index is seen rising 4.6% year-over-year, the same as seen in March. Any further evidence of cooling inflationary pressures may reinforce the argument around the Fed pausing and eventually cutting interest rates later in 2023.

Currency spotlight – GBP/USD

GBPUSD could see more weakness if the pending UK inflation data on Wednesday shows signs of cooling inflationary pressures. Markets forecast inflation cooling to 8.2% in April, down from the 10.1% in March. If expectations match reality, this would be the sharpest decline in more than 30 years, bringing an end to seven consecutive months of double-digit inflation. Looking at the technical picture, GBPUSD may slip towards 1.2370 on expectations around the BoE potentially pausing rate hikes. A solid breakdown below 1.2370 could signal a further selloff towards 1.2280. If prices push back above 1.2450, bulls may target 1.2550.

Commodity spotlight – Gold

Gold prices got no love on Tuesday morning, shedding 0.5% as optimism over the US debt ceiling developments dampened its allure. This promises to be another volatile week for the precious metal thanks to the cocktail of risk events and economic releases. If US debt talks continue to head in the right direction and hopes continue to rise over a deal reached, this could drag prices lower as risk appetite returns. Expect gold to also be influenced by the Fed minutes and key US data including the inflation report on Friday. Focusing on the technicals, sustained weakness below $1970 may open a path toward $1945 and $1900 respectively. Bulls need to claw their way back above $2000 to get back into the game.