Debt ceiling talks were deemed productive and positive yesterday, with President Joe Biden reiterating once again that default is off the table, although an agreement has still yet to be reached.
USD erased losses from earlier in the day following calls from Fed speakers that more rate hikes may be needed to quell price pressures. Yields on US treasuries climbed as a result. GBPUSD and EURUSD stayed close to Friday’s lows as the rate expectations between respective central banks continued to narrow.
* Daily move - against G10 rates at 8:00am, 23.05.23
** Indicative rates - interbank rates at 8:00am, 23.05.23
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All eyes on PMI numbers to give markets a gauge of how the UK, EU, and US performed in May. There is an expectation for slightly lower numbers to come in across the board when compared to April, and as ever we will be looking for divergence from what’s expected. UK service numbers will be the focus with regards to BoE rate expectations this year. Ahead of UK inflation numbers on Wednesday, GDP numbers from Germany and the US on Thursday, and core PCE numbers on Friday, markets seem likely to continue to be dictated by Fed speak as well as debt ceiling talks. For the time being the easing of Fed rate cuts this year and rising treasury yields is keeping USD in demand.
US treasury yields have been rising consistently over the course of this month, rising from 3.8% to 4.34% - the highest since March. As a result, the US dollar has been supported since hitting the 100.8/101 support level. Markets have erased around 50 bps of rate cut expectations from the Fed this month following hawkish Fed speak, as well as data supporting the idea that inflation remains sticky. The Fed’s preferred measure of inflation, core PCE, will be out on Friday and a higher number will likely continue this momentum.
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