The US Dollar has had an exceptional week, seeing some of the strongest gains this year. This came after the CPI and consumer inflation expectations eased, which led to a decrease in expectations for a Fed rate cut. Moving forward, attention will be directed towards retail sales, jobless claims, and an upcoming speech by Jerome Powell.
The US Dollar had an impressive 5-day period, best of the year, surging against other currency counterparts. Notably, EUR/USD climbed by 1.6%, which is typically unusual. However, Australian and New Zealand Dollars had a tough week, becoming the worst-performing currencies.
The recent University of Michigan Sentiment report revealed that consumers’ expectations for inflation were higher than anticipated, despite the report being below expectations. The majority of Americans remain concerned about rising prices, which could lead to potential economic consequences in the future.
Meanwhile, the latest US CPI report showed lower headline inflation at 4.9%, however, core gauge remained stable at 5.5%. This reflects underlying price pressures that could lead to traders gradually pricing out rate hike expectations.
Further, Treasury yields rose on Friday alongside a reduction in risk appetite, which propelled the US Dollar higher.
In the wake of Michigan data, both NASDAQ and S&P 500 stocks fell by 1%, before rebounding in the afternoon to close -0.35% and -0.16%, respectively. Meanwhile, European stocks showed modest gains, with Euro Stoxx 50 finishing up 0.2%.
The week was marked by a mixed performance, with Shanghai and Hong Kong underperforming in the face of faltering economic recovery, while Japan and Australia fared the best. US equities finished narrowly mixed, with NASDAQ slightly down and both S&P500 and the Dow slightly up.
The New Zealand dollar, which has been performing exceptionally well recently, experienced a sharp drop on Friday, losing 1.7% against the US dollar. This outperformed every other G10 currency pair by almost 1%.
Along with the Australian dollar, which suffered from the US yield’s rise, the Norwegian Krone remained stable amid declining oil prices.
The DXY index also rose impressively by 1.5%, whereas the Swedish Krona suffered the most among G10 currencies, dropping over 2% for the week.
Is a potential Eurovision victory related bounce in order today?
The Week Ahead
Looking ahead, the US economic calendar is relatively quiet this week. However, observers need to keenly watch for key data releases, such as retail sales, NY State manufacturing survey, MBA mortgage applications, and initial jobless claims.
Both in the US and globally, will center on the progress of debt ceiling talks, slated to resume on Monday. Treasury Secretary Janet Yellen did not provide an update at the G7 meetings in Tokyo, but with the Treasury’s cash reserves reportedly down to $88 billion, a higher than expected tax receipt will be needed to avoid hitting the “X-date” of June 1st.
In Europe, weak Eurozone industrial production is expected due to already negative data in Germany and Italy, while the UK labor market’s wages will influence the Bank of England’s policy decisions in June.
China’s April activity readings will offer insight into the economy’s recovery post-COVID, as well as the possibility of a cut in the 1-Yr Medium Term Lending Facility rate by the PBoC. Local interest will be on the RBA Minutes and the Q2 Wage Price Index, with the latter expected to show a YoY increase from 3.3% to 3.6%.
Thursday’s employment data is also highly anticipated, with an expected employment consensus of 25k and an unchanged unemployment rate of 3.5%.
Lastly, anticipation continues to surround a policy panel where Fed Chair Jerome Powell and former Chair Bernanke are due to participate.
Should Mr. Powell’s sentiments pour cold water on near-term rate cut expectations, financial markets could face volatility, which may benefit the haven-linked and policy-sensitive US Dollar.
G7 Finance Chiefs Warn Of A Looming U.S. Debt Crisis
Finance leaders from the Group of Seven (G7) nations expressed concerns regarding rising economic uncertainty during their three-day meeting in Niigata, Japan. The gathering was overshadowed by the U.S. debt stalemate and fallout from Russia’s invasion of Ukraine.
Global policymakers are grappling with the potential default of the world’s largest economy, with the communique making no mention of the impasse. The G7 leaders stressed the importance of remaining vigilant and flexible in their macroeconomic policy amid heightened uncertainty.
The central bank chiefs vowed to combat elevated inflation and ensure well-anchored expectations on future price moves. The debt ceiling showdown was discussed during a dinner on Thursday with no further details provided.
Biden’s Upbeat Outlook on Debt Talks
President Joe Biden expressed his optimism about reaching an agreement with Republican opponents to raise the US debt limit and avoid a default.
The Republicans are insisting on budget cuts in exchange for raising the borrowing limit, while the White House has firmly stated that the nation’s credit should not be subject to negotiations.
Congress must raise the debt limit in order to pay the government’s bills, but the two sides have yet to reach a deal despite warnings of catastrophic consequences from government officials and bankers.
If Congress fails to raise the debt limit before default, the United States could experience a recession. Biden reaffirmed his desire for a “clean” hike of the debt ceiling, while Republicans want to implement substantial cuts in spending.
However, there is hope from both sides that an agreement can be reached. The looming possibility of default has also complicated Biden’s upcoming trip to Asia.
Despite constructive staff-level negotiations and Biden’s laid-out plan for debt relief, there is still much work to be done to prevent a catastrophic default that could cost millions of jobs.
Lael Brainard, the director of the White House’s National Economic Council, maintains that a deal will be reached, and Biden plans to continue negotiations in a much-awaited round of debt-ceiling talks.
About The U.S. Debt Ceiling
The US government faces strict borrowing limits when meeting its legal obligations, such as paying interest on debt, military salaries, tax refunds, and social security. Currently set at $31.381 trillion, the debt ceiling has already been breached as of January 19th. The Treasury department has since implemented extraordinary measures to reduce government investments and ensure bill payments can continue. While the government has some cash reserves, both the reserves and the measures are expected to run out by June 1st.
Fundamental Analysis: AUD/USD & NZD/USD in View of US Debt Crisis
The beginning of the week appears calm for AUD/USD & NZD/USD. With no major economic indicators, news concerning the US debt ceiling will have an early impact.
The AUD/USD & NZD/USD have had a subdued start to the day, as there have been no noteworthy economic data from Australia or New Zealand. This leaves the Aussie and Kiwi vulnerable to market sentiment.
The pairs suffered significant losses towards the end of last week due to the US debt crisis and the mounting threat of a global recession, which weighed down on riskier assets. This morning, developments relating to the US debt ceiling will impact the markets before the US session begins.
Furthermore, economists predict that the NY Empire State Manufacturing Index numbers for May will be negative – falling from 10.8 to -2.5, which is a bearish indication.
Lastly, commentary from FOMC members Kashkari, Bostic, and Barkin is also expected to draw attention today.
Cryptocurrency Updates As Traders Weigh On The Impending Debt Crisis
Bitcoin prices surged past US$27,000 in Asia on Monday, despite rising transaction fees caused by network congestion. Meanwhile, Ethereum saw a boost above the US$1,800 support level, and Litecoin emerged as the top gainer among non-stablecoin cryptos.
US equity futures fell on Friday as investors worry about a possible debt default. On Saturday, Ethereum resolved performance issues and added updates to its blockchain.
Litecoin, which is set to halve its block reward on August 3, faced a surge in interest as Bitcoin transaction fees soared. The total crypto market capitalization rose 0.43% to US$1.13 trillion in the past 24 hours.
- Despite losses against the USD at the end of the week, the British Pound saw positive data gains. With key support at 1.2460, the upcoming UK Employment data are expected to fuel a bullish continuation for the pound.
- The Australian Dollar took a hit at the end of last week as the US Dollar gained favour due to increasing bets that the Fed will soon slash target rates.
- Gold prices have remained steady, supported by safe-haven demand, despite recent gains in the US Dollar brought on by surprising inflation statistics.
- Growing concerns over recession and the debt ceiling impasse have impacted the crude oil market, leading to subdued prices in the near term and lowered market sentiment and risk appetite.
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