Daily FX 30.05.23: US Yields, Congressional Manoeuvrings To Dominate Pound Vs Euro, Dollar


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30.05.23: US Yields and Congressional Manoeuvrings will Dominate Near-Term Sterling and Euro Moves against the Dollar

US developments are likely to remain dominant for currency-market moves in the short term.

The deal between the US Administration and House Speaker McCarthy over the debt ceiling has eased immediate fears of a default, but the legislation still needs to be approved in Congress.

There will be a slump in risk appetite if the Bill fails to gain majority support with the near-term manoeuvres in Congress watched closely. The House rules Committee is due to consider the Bill on Tuesday with a full vote on Wednesday.

US monetary policy will also be a key element in the short term.

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Following the latest round of data and Fed comments, markets expect that the US central bank will increase rates again in June or July.

These expectations will tend to support the dollar and there will also be fresh concerns surrounding the global outlook as financial conditions continue to tighten.

Overall, markets will need evidence that US inflation is moderating or that the economy is coming under sustained pressure for the underlying market dynamics to change.

Pound US Dollar Exchange Rate Outlook

Sterling overall has held a firm tone, although activity was inevitably been curbed by the UK holiday weekend.

The Pound to Dollar (GBP/USD) exchange rate found support just above 1.2320, but again hit selling above 1.2350 on Tuesday amid a strong dollar tone.

The latest British Retail Consortium (BRC) data recorded a 9.0% increase in shop prices in the year to April from 8.8% previously and a fresh record high since the series started in 2005.

There was a slight moderation in food-price inflation to 15.4% from 15.7% previously.

The data overall will maintain expectations that the Bank of England will have to maintain a hawkish policy stance which will underpin the Pound.

Global risk conditions will be important with the Pound better-placed if there are gains in equities.

In this context, the US debt-ceiling developments will continue to be significant.

Expectations of further Bank of England rate hikes should continue to provide underlying Pound support, but GBP/USD will find it very difficult to gain traction in the short term unless there is a turn in the dollar.

Euro (EUR) Exchange Rates Today

The Euro overall has been unable to make any headway in global currency markets with further reservations surrounding the Euro-Zone outlook.

The Euro to Dollar (EUR/USD) exchange rate has dipped to 2-month lows with a test of the 1.0700 level and was held close to this level on Tuesday after a move above 1.0750 faded quickly.

ECB council member Wunsch stated that the expansive fiscal policy requires a stronger monetary policy reaction, maintaining expectations of further rate hikes.

The Euro has still been unable to make any headway with rallies quickly attracting selling interest and EUR/USD dipped to fresh 2-month lows below 1.0700 in early Europe on Tuesday.

Overall, EUR/USD will need a retreat in US yields to find significant relief.

US Dollar (USD) Exchange Rates Outlook

The US PCE prices index increased 0.4% for April with the year-on-year rate increasing to 4.4% from 4.2% and above expectations of 3.9%. The core index increased 0.4% compared with consensus forecasts of 0.3% with the year-on-year rate edging higher to 4.7% from 4.6% and above expectations of 4.6%.

There was a further shift in Fed Funds futures with markets pricing in around a 65% chance that the Fed will lift interest rates to 5.50% at the June policy meeting.

Over the weekend, US President Biden and House Speaker McCarthy announced they had reached a provisional deal with the Republicans agreeing to raise the debt ceiling in return for limited spending cuts.

The dollar continued to gain net support from higher yields and expectations of Fed tightening with the dollar index close to 2-month highs while the dollar to yen (USD/JPY) exchange rate posted 6-month highs around 140.90 before a sharp correction.

The US employment data will be a key element this week with the data on Job openings on Wednesday followed by ADP private payrolls and jobless claims releases on Thursday.

These releases will be followed by the monthly employment data on Friday.

The data will be important for underlying expectations surrounding the outlook.

The dollar overall is likely to maintain a firm tone unless there is a dip in US yields.

Wells Fargo, expect that the dollar will eventually fade. According to the bank; “The greenback could be relatively stable in the near term, as some additional Fed tightening combined with the potential for mildly unsettled markets could provide temporary support for the greenback.

It adds; “However, we expect the US currency to eventually come under pressure as aggressive Fed easing starts from early 2024.”

The bank forecasts that the trade-weighted Dollar will decline 1.5% by the end of 2023 with a further decline of 5% in 2024.

Other Currencies

The yen has attempted to stabilise in global currency markets on Tuesday, but rebounds have continued to attract selling interest with yield spreads negative for the currency while the Bank of Japan has maintained a dovish policy stance.

The Pound to Yen (GBP/JPY) exchange rate posted fresh 7-year highs just below the 174.00 level in early Asian trading on Monday before a net retreat to 173.40 on Tuesday.

New Zealand data remained weak with a 2.6% decline in building permits for April. The Pound to New Zealand dollar (GBP/NZD) exchange rate hit a fresh 15-month high at 2.0470 before a slight correction.

The Pound to Australian dollar (GBP/AUD) exchange rate retreated to 6-day lows at 1.8860 on Monday with UK markets closed before a strong rebound to 1.8960 on Tuesday as Australian building approvals registered a slide for April.

The Pound to Canadian dollar (GBP/CAD) exchange rate consolidated around 1.6800.

The Day Ahead

The US will release the latest data on consumer confidence with consensus forecasts for a small monthly decline on the month.

A sharp decline would raise fresh reservations over the outlook.

Markets will continue to monitor comments from Federal Reserve officials during the day.

There will be a currency-market impact from month-end position adjustment with choppy trading realistic.

Overnight, the latest monthly Australian inflation data will be released. China will also release the latest PMI business confidence data for May.

The Chinese data will have an important impact on confidence surrounding the Chinese and global outlook.

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