Daily Market Pulse
Markets Take a Breath Amid Stalled US Debt Talks, Light Economic Calendar5 minute read
The Dollar begins this week in the red as it weakens slightly against most of its G7 counterparts. Last week, the Dollar Index finished up nearly 0.5%, its second consecutive week of gains, although it took a step back on Friday after Fed Chair Powell refrained from supporting a June rate hike.
Markets priced in a 40% chance of a June hike as of Friday morning, but this has since fallen to around 15%, leading to a softer Dollar coming into this week.
Traders are also closely monitoring the progress of the United States debt ceiling talks, briefly disrupted after Republicans walked out of Friday's negotiations. However, discussions have resumed with House Speaker McCarthy set to Meet President Biden today as the clock ticks towards the estimated early-June deadline for a deal – after which the US treasury would likely default on its obligations.
The Euro is up slightly against the Greenback this morning ahead of the Eurozone consumer confidence release set for 10:00 AM EST, as EUR/USD looks to build off Friday's rally.
The rebound was driven mainly by comments by both ECB and Fed officials, indicating the potential for monetary policy divergence between the two central banks.
While Fed chair Powell struck a dovish tone and preferred a meeting-to-meeting approach to interest rates, ECB President Lagarde told officials to "buckle up" for "sustainably high-interest rates" as Eurozone inflation remains stubbornly high.
On the data front, Eurozone construction output declined 1.5% year-on-year in March - the most substantial decrease since August 2021. On a monthly basis, there was a contraction of 2.4% in March after two months of consecutive expansion in January and February.
The Pound finished modestly lower last week against the Dollar but has recouped its losses this morning – up 0.15% heading into the US session. With little data of significance on the calendar today, GBP traders will have their sights set on tomorrow's trifecta of preliminary May PMI data. The most anticipated of the bunch will be the Services PMI, expected to come in at 55.5, just below the April read of 55.9 but still firmly in expansion territory.
Meanwhile, Manufacturing PMI is expected to come in around 48, making it 10 consecutive months of contraction for the sector.
The Japanese Yen continues to tumble today after losing over 1.5% against the Dollar last week. It is on pace for its second consecutive month of significant declines after losing around 2.6% in April. However, the Yen did manage to cut into the losses on Friday after April inflation figures out of Japan came in hotter than expected.
To kick off the Asian markets session overnight, Japan released their core machinery orders for March, which slightly improved but still fell short of expectations, with a decline of 3.9% compared to February. Meanwhile, private-sector machinery orders came in far worse than expected – dropping 3.5% year-on-year against a 1.4% rise expectation.
With Canadian traders on the sidelines to celebrate Victoria Day, there has been little action on USD/CAD this morning as the pair grinds out a modest 0.05% gain heading into the US session. Last week, the Loonie finished up over 0.4% against the Greenback after the surprising rise in Canadian inflation boosted bets of another Bank of Canada hike on the horizon, with markets pricing in a 40% chance of a BoC hike by September.
Looking ahead, there is little Canadian data for traders to digest this week, with tomorrow's Industrial Product Price and Raw Material Price Index the lone events on the calendar.
The wheels have fallen off the Peso since hitting seven-year highs last week.
Since then, MXN has posted four-straight losing days and is on pace for a fifth today, trading around 0.5% lower against the Dollar this morning.
Much of the move was driven by broader risk sentiment fueling Dollar buying.
However, Thursday's decision by Banxico to hold interest rates also hurt the Peso as it signaled the massive interest rate differential between Mexico and the US may have peaked – although the potential for Fed rate cuts later this year could change that thinking.
Next on the economic calendar is May's first half-month inflation numbers set for Wednesday, where markets expect a slight acceleration in core inflation but deflation in overall prices.
After suffering a 1.6% loss last week, the Brazilian Real begins the new week in the green – up over 0.3% this morning against the Dollar. A big chunk of last week's losses can be attributed to fears of the Brazilian government gaining more influence on the central bank's monetary policy and concerns that leading economic indicators, such as job creation and household debt, could keep future growth in check.
Next up on the data front is mid-month inflation for May, set for release on Thursday, followed by April's current account data on Friday. The former is expected to show inflation accelerating slightly in Brazil, which could complicate the Central Bank's interest rate dilemma.
CNY recovered from a five-month low on Friday but is on the back foot again today despite the PBoC's decision to hold its lending rates for a ninth-straight month.
The Bank left the one-year loan prime rate unchanged at 3.65% and the five-year rate steady at 4.3%, following its decision to keep the medium-term policy rate at 2.75% last week.
With no economic data expected out of China this week, CNY traders will heavily focus on the heap of US data and debt ceiling headlines to dictate the short-term direction of the Yuan.