Daily Market Pulse

Dollar Slips from Two-Month High as Washington Strikes Tentative Debt Ceiling Deal

5 minute read

USD

The US Dollar initially rose to a two-month high after the US government announced it reached a deal to suspend the debt ceiling until January 2025, initially seen as a relief for markets.  However, concerns emerged that the deal could face obstacles in Congress ahead of Wednesday’s vote.

Some investors worry that the agreement, while avoiding a default, could have negative long-term consequences due to the lack of significant spending cuts. 

Additionally, a few hard-right Republican lawmakers have opposed the deal, highlighting the challenges that President Biden and Republican leader McCarthy will face in getting the package approved in Congress.  Treasury Secretary Yellen had previously warned that a default could occur if the debt ceiling were not increased by June 1, but now the deadline has been extended to June 5. 

EUR

The Euro is headed higher this morning after posting five-consecutive days of losses. 

The rally comes as markets position themselves ahead of tomorrow’s US debt ceiling vote in Washington while digesting a string of data from Europe this morning.

On the inflation front, Spain’s consumer prices dropped to 3.2% in May, the lowest level since July 2021, driven by declining fuel prices and a minor increase in food and non-alcoholic beverages.  However, despite the decrease, inflation remains above the ECBs target.  Meanwhile, industrial producer prices in Italy fell by 1.5% year-on-year in April, led by a decline in energy prices.

In addition, the Eurozone’s economic sentiment indicator declined to 96.5, hitting its lowest level since November 2022 due to a stagnant economy, high inflation, and rising interest rates.

GBP

The Pound is one of the day’s top performers thus far, gaining over 0.5% against the Greenback heading into the US session.  With a quiet calendar in the UK this week, the US debt ceiling vote and subsequent market reaction are expected to be the primary drivers of GBP this week.

The focus remains on UK inflation, which has been higher than many expected.  A recent survey shows shop price inflation reached its highest level since 2005, although there has been a slight cooling in food prices.  This only adds to the pressure on the BoE to continue raising interest rates, which markets are now pricing in over 1% in rate hikes for the rest of 2023.

JPY

The Yen is up for the second straight day as news emerged of a meeting between Japan’s finance ministry and the BOJ, leading to speculation that Japan’s ultra-loose stance on monetary policy may be under review.

On the data front, Japan’s unemployment rate decreased to 2.6% from the previous month’s 14-month high of 2%, surpassing market expectations. 

Furthermore, the number of unemployed individuals declined by 150,000, while employment increased by 130,000. 

Overall, the labor force decreased slightly, although the participation rate rose year-on-year.  Meanwhile, the jobs-to-applications ratio remained at a seven-month low of 1.32 in April, matching market expectations.

CAD

The Loonie is clinging to modest gains this morning after posting gains of around 0.15% against the Dollar yesterday.  USD/CAD is little changed in the aftermath of this morning’s current account data out of Canada, which showed a smaller-than-expected deficit in Q1.

Loonie traders now shift their attention to tomorrow’s GDP print, which is expected to show 2.5% growth year-on-year after coming in flat on the previous read. 

From a quarterly perspective, market forecasts point to a 0.4% rise in Q1 after remaining stagnant in Q4.  

The GDP release is expected to play a significant role in the BoC’s interest rate decision, with markets currently pricing in a 30% chance of a hike as of this morning.  The odds of a hike have been boosted after recent inflation numbers came in higher than expected, although BoC Governor Macklem believes this was an anomaly.

MXN

The Mexican Peso has strengthened for the third consecutive session, reaching two-week highs, as a tentative deal to raise the US debt ceiling boosts currencies across Latin America.  In addition, recent data have highlighted Mexico’s relative economic strength compared to its peers, despite the aggressive tightening by Banxico over the last year. 

Looking ahead, Mexico will release its April fiscal balance at 5:00 PM EST today, where it is expected to return to a surplus after running a deficit in March. 

However, Friday’s jobless rate will be the most anticipated release of the week in Mexico, with markets expecting a slight bump up to 2.7% in April after coming in at 2.4% in March.     

BRL

After beginning the week on the back foot, the Brazilian Real is back in the green today ahead of a busy week on the economic calendar.  

Earlier this morning, May’s Wholesale Inflation Index came in far better than expected – showing a decline of 1.84% versus an expected drop of just 0.45% after declining 0.95% in April.  The fall should be music to the ears of Brazilian President Lula da Silva as he continues his campaign against the central bank’s aggressive interest rate stance.

Up next on the calendar is April unemployment data tomorrow, which is expected to show a modest decline to 8.7% after reaching 8.8% in March.

CNY

The Yuan remains fragile this morning, hovering at a six-month low against the Greenback, as concerns remain over the country’s post-pandemic recovery losing momentum.

The pattern of disappointing economic data continued over the weekend after industrial profits plunged by 20.6% year-on-year in the first four months of 2023. 

A weak economic recovery, low demand, and margin pressures drove the decline.  Among the industries surveyed, many experienced losses, including sectors like metal smelting, petroleum, chemical products, and electronics.

The focus now shifts to the upcoming release of May PMIs overnight, which is expected to indicate a contraction in China’s factory activity for the second straight month.  

 
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