Gold dips as Fed officials suggest higher-for-longer US rates

“I am not a product of my circumstances. I am a product of my decisions.” —Stephen Covey 

HEADLINES

• Dollar gains against yen as Fed policy, debt ceiling in focus
• Gold dips as Fed officials suggest higher-for-longer US rates
• Oil futures steady as US default risk offsets supply decline
• Nasdaq, S&P 500 rise amid fresh round of debt talks; Micron slides
• Treasury yields inch higher as investors weigh debt ceiling talks, Fed rate policy
• EUR/GBP to turn higher in 12-month view reflecting sluggish UK fundamentals – Rabobank 
• EURUSD Short Term: Upside favored

Dollar gains against yen as Fed policy, debt ceiling in focus

The dollar rose against the Japanese yen on Monday, holding just below a six-month high, as investors waited on fresh signals on whether the U.S. Federal Reserve is likely to continue hiking interest rates and watched for news that Congress will reach an agreement to raise the U.S. debt ceiling.

The greenback has bounced for the past two weeks as stronger than expected economic reports and hawkish Fed officials keep the prospect of further interest rate increases alive.

But comments from Fed Chair Jerome Powell on Friday that tighter credit conditions could mean fewer rate hikes pulled the greenback off its highs.

COMMODITIES

Gold dips as Fed officials suggest higher-for-longer US rates

Gold prices inched lower as hawkish comments from a couple of U.S. Federal Reserve officials on Monday weighed on non-yielding bullion and markets looked for more clarity around the U.S. debt ceiling negotiations.

Markets now await the minutes of the latest U.S. Federal Open Market Committee meeting due on Wednesday. Markets are pricing in a 68.6% chance of rates being held steady next month, yet a 31.4% chance of a 25-basis-point hike, the CME FedWatch tool showed.

ENERGY

Oil futures steady as US default risk offsets supply decline

Oil prices traded either side of unchanged on Monday as the market waited for news on the U.S. debt ceiling talks and as a stronger dollar offset support from lower supplies from Canada and OPEC+ producers.

A stronger dollar can weigh on oil demand by making the fuel more expensive for holders of other currencies.

Last week, both oil benchmarks gained about 2%, their first weekly rise in five, after wildfires shut in large amounts of crude supply in Alberta, Canada.

STOCKS

Nasdaq, S&P 500 rise amid fresh round of debt talks; Micron slides

The Nasdaq and the S&P 500 rose on Monday as markets turned to megacap stocks while awaiting updates on a fresh round of talks about raising the U.S. debt ceiling, and shares of Micron fell after China's ban on its memory chips.

President Joe Biden and House Republican Speaker Kevin McCarthy will meet for talks on Monday after their discussions almost fell apart on Friday. The fresh talks come less than two weeks before a deadline after which the Treasury warned that the federal government will struggle to pay its debts.

A default would cause chaos in financial markets and spike interest rates.

Treasury yields inch higher as investors weigh debt ceiling talks, Fed rate policy

U.S. Treasury yields rose on Monday as investors monitored debt ceiling deal negotiations and assessed what could be next for Federal Reserve interest rate policy after mixed messages from officials.

Debt ceiling discussions are set to continue Monday, with President Joe Biden and House Speaker Kevin McCarthy expected to meet for negotiations at 5:30 p.m. ET. The U.S. risks defaulting on its debt as soon as June 1 if lawmakers fail to agree on a resolution.

ANALYSIS

EUR/GBP to turn higher in 12-month view reflecting sluggish UK fundamentals – Rabobank 

“Unless forthcoming Eurozone economic data surprises on the upside, there may be only a muted reaction to hawkish commentary from ECB officials in the coming weeks. Similarly, the market is also priced for further BoE rate hikes, suggesting there may be limited additional upside for GBP from ongoing hawkish remarks from BoE policymakers. This backdrop is heavily suggestive of range trading for EUR/GBP in the coming weeks.”

“Further out, we retain our forecast that EUR/GBP will grind higher to 0.90 on a 9 to 12-mth view. In that time frame, the market is likely to be focused on the prospect of looser monetary conditions from both the ECB and the BoE. Our expectation of GBP underperformance over the medium term is drawn from concerns over UK growth potential related to labour market shortages and ongoing low investment and productivity growth in the UK.”

CHART

EURUSD Short Term: Upside favored

Technical View: Long position above 1.0795. Target 1.0845. Conversely, break below 1.0795, to open 1.078.

Comments: The pair remains supported. Further advance favored.

Source: Trading Central 

CALENDAR

*Times in GMT

Source: FX Street Economic Calendar

Footnotes
https://www.reuters.com/markets/currencies/dollar-defensive-after-dovish-powell-debt-ceiling-setback-2023-05-22/
https://www.reuters.com/article/global-precious/precious-gold-dips-as-fed-officials-suggest-higher-for-longer-us-rates-idUSL4N37J37Y
https://www.reuters.com/business/energy/oil-edges-up-supply-worries-g7-pledge-enforce-russian-price-caps-2023-05-22/
https://www.reuters.com/markets/us/futures-flat-debt-limit-talks-continue-micron-slides-2023-05-22/
https://www.cnbc.com/2023/05/22/us-treasury-yields-investors-weigh-debt-ceiling-talks.html
https://www.fxstreet.com/news/eur-gbp-to-turn-higher-in-12-month-view-reflecting-sluggish-uk-fundamentals-rabobank-202305221400