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Debt Ceiling Deal Breakthrough: Impact to USD & DXY Index

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Get ready for a week full of market activity as we take a closer look at the Nasdaq 100, Dow Jones, Debt Ceiling, US Dollar,  Gold and NFPs.

Tech stocks dominated the markets last week, with the Nasdaq Composite soaring 2.51%, while the Dow Jones plummeted -1%. Nvidia Corp blew past earnings projections, causing a ripple effect that boosted tech stocks. 

Meanwhile, the top 7 companies in the S&P 500 gained over 40% since December, while the rest of the market only saw 1% gains. 

Strong economic data has led to markets pricing out the possibility of rate cuts from the Federal Reserve, with a 25 basis point hike expected in July.

However, markets are not fully factoring in the monetary policy implications of a US debt ceiling deal, which is causing volatility risks. 

This week, investors are keeping an eye on ISM Manufacturing PMI, Canadian GDP, and Euro Area inflation. 

Will gold see a deeper correction due to rising real yields and USD strength? What will be the impact of a potential debt ceiling deal on the Euro’s recovery? 

Don’t miss out on the latest updates from the TraderFactor Economic Calendar! Stay tuned and stay informed.

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“Debt Ceiling Deal Breakthrough: Potential Impact on US Dollar and DXY Index”

The US Dollar is expected to experience a sudden change this week due to a resolution of the debt issue. Treasury yields are showing strength while equity markets have received a slight boost.

Still, if the demand for a safe haven currency decreases, where will the US Dollar stand?”

The possibility of a debt ceiling deal being passed by Congress this week has stabilized the value of the US dollar at the beginning of the week.

President Joe Biden and House Speaker Kevin McCarthy announced over the weekend that they have come to an agreement on the issue, which will be voted on within a few days. 

To avoid a default, both sides have compromised. The Treasury has warned that they could run out of cash by June 5th if the ceiling is not lifted in time.

Although the resolution of the debt ceiling issue might be seen as negative for the US Dollar, recent Treasury yields have been on the rise. 

Wall Street futures indicate a slight upturn after several positive gains last week. On the international trading front, APAC equities have been mixed, crude oil has made a comeback after dropping last week, while gold is struggling to start the week. 

Please note, due to today’s UK, Switzerland, and US holiday, trading may be uneventful.

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“US Debt Deal Boosts USD Against Japanese Yen, as Fed Rate Hike Expectations Rise. See How It Affects EUR/JPY and GBP/JPY.

The Japanese yen remains weak against the US dollar after the positive news of a potential US debt agreement.

As the likelihood of a Federal Reserve rate hike grows, market-watchers are closely monitoring the situation. However, when compared to other currencies, the outlook is more optimistic.

An agreement has been reached between US President Joe Biden and House Speaker Kevin McCarthy to raise the government’s debt ceiling. This development could help prevent a potentially catastrophic default and will soon be voted on by Congress.

Strong US economic data, coupled with hawkish language from Federal Reserve officials, suggest a rate hike at next month’s meeting is more likely.

The market is confident in a 60% chance of a 25-basis-point rate hike on June 14, compared to 17% just a week ago. No rate cuts are expected until the end of the year.

Inflation in Tokyo slowed in May, aligning with the Bank of Japan’s projection. BOJ Governor Kazuo Ueda expects prices to slow before increasing, supporting the current policy. 

Although the bank has been hesitant to adjust ultra-loose policy settings, it may be a matter of time before they tweak their approach given Japan’s inflation levels surpassing their targets.

USD/JPY Surges Above Resistance Pointing to Potential Highs

Breaking above the significant resistance level at 138.00 from the March and May highs, USD/JPY brings us closer to the late-November high of 142.25.

The pitchfork channel from January and a rising channel from the beginning of this year suggest interim resistance points at the median line around 141.30 and the rising channel’s upper edge. For a reversal of the upward pressure, USD/JPY must fall below 133.75.

GBP/JPY Testing Key Hurdle, Ready to Climb Higher

As GBP/JPY tests the October high of 172.10, it shows signs of upward momentum on higher time frame charts despite minor fatigue on smaller timeframe charts.

In order to relieve short-term upward pressure, the cross must break below the low of 171.20 from last week. Expect resistance at subsequent points like the 78.6% retracement of the 2015-2016 slide at 180.50.

EUR/JPY Overbought on Higher Timeframe Charts, But Rally Unlikely to Fade

EUR/JPY Overbought on Higher Timeframe Charts, But Rally Unlikely to Fade

EUR/JPY is overbought on higher timeframe charts as it tests a tough barrier at the 2014 high of 149.75. The Directional Movement Index (DMI) indicates a consolidation instead of the start of a new leg up from mid-May.

The Plus DMI and Minus DMI are under 25, suggesting non-trending and range-bound conditions. However, the bullish pressure is unlikely to fade unless the cross drops below 145.50-146.50, including the 200-period moving average on the 240-minute charts.

Gold Prices Have Fallen To A 2-Month Low Due To The Rise In Us Dollar And Treasury Yields 

The US debt ceiling concerns seem to be dissipating as Treasury yields have been steadily climbing, particularly at the short end of the curve.

The Federal Reserve’s stance indicates that there will be no rate cuts this year, causing the markets to reflect a higher rate of return. Due to the rise in US rates, investors may have to reconsider the value of non-interest-bearing commodities such as gold. 

The US Dollar seems to be affecting the direction of gold prices while gold volatility is slipping, potentially indicating a stable market. 

Despite the commodity complex being lower, silver managed to notch up a decent rally on Friday.

Disclaimer:

All information has been prepared by TraderFactor or partners. The information does not contain a record of TraderFactor or partner’s prices or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any material provided does not have regard to the specific investment objective and financial situation of any person who may read it. Past performance is not a reliable indicator of future performance. 

Author

  • Zahari Rangelov

    Zahari Rangelov is an experienced professional Forex trader and trading mentor with knowledge in technical and fundamental analysis, medium-term trading strategies, risk management and diversification. He has been involved in the foreign exchange markets since 2005, when he opened his first live account in 2007. Currently, Zahari is the Head of Sales & Business Development at TraderFactor's London branch. He provides lectures during webinars and seminars for traders on topics such as; Psychology of market participants’ moods, Investments & speculation with different financial instruments and Automated Expert Advisors & signal providers. Zahari’s success lies in his application of research-backed techniques and practices that have helped him become a successful forex trader, a mentor to many traders, and a respected authority figure within the trading community.