Gold dips on dollar strength as U.S. debt talks drag

“It is better to fail in originality than to succeed in imitation.” —Herman Melville 

HEADLINES

• Dollar gains on resilient U.S. economy, flight to safety
• Gold dips on dollar strength as U.S. debt talks drag on
• Oil prices gain 1% on falling U.S. stockpiles, Saudi warning
• Wall St slides as debt ceiling talks drag on
• Treasury yields rise as investors follow debt ceiling negotiations, Fed minutes
• USD/CAD: Moderate potential for further Loonie recovery – Commerzbank 
• USDJPY Near Term: Upside favored

Dollar gains on resilient U.S. economy, flight to safety

The dollar hit a fresh two-month high against a basket of peers on Wednesday as a resilient U.S. economy helped to bolster the currency, while unease over debt ceiling talks in Washington kept investor flows moving to safe havens.

The impasse in Washington over debt ceiling negotiations has helped to lift the dollar, even though it could lead to a default and push the U.S. economy into recession as investors fear it might spell worse trouble for the global economic outlook.

Central bank policy divergence has been a popular theme among FX investors this year, with a recent outlook suggesting the Federal Reserve would start cutting rates soon, said Joe Manimbo, senior market analyst at Convera in Washington.

COMMODITIES

Gold dips on dollar strength as U.S. debt talks drag on

Gold eased on Wednesday as the dollar firmed, cutting some safe- haven flows into bullion from the looming risk of a U.S. debt default as talks entered a critical stretch, while investors awaited minutes of the Federal Reserve’s recent policy meeting.

The dollar index rose to a fresh two-month high, weighing on demand for greenback-priced bullion.

Negotiators for Democratic President Joe Biden and top congressional Republican Kevin McCarthy were set to reconvene on Wednesday morning, seeking a deal to raise the debt ceiling and avoid a catastrophic default.

ENERGY

Oil prices gain 1% on falling U.S. stockpiles, Saudi warning

Oil prices rose over 1% on Wednesday, after a large unexpected drawdown in U.S. crude inventories and a warning from the Saudi energy minister that raised the prospect of further OPEC+ production cuts.

U.S. crude inventories posted a massive surprise weekly drawdown of 12.5 million barrels to 455.2 million barrels, the Energy Information Administration said. Analysts had expected an 800,000-barrel rise.

U.S. gasoline stocks dropped by 2.1 million barrels in the week to 216.3 million barrels, the EIA said, while distillate stockpiles fell by 600,000 barrels to 105.7 million barrels.

STOCKS

Wall St slides as debt ceiling talks drag on

Wall Street's main indexes fell on Wednesday as talks between the White House and Republican representatives on raising the debt ceiling dragged on without a deal.

Stocks held their declines after the release of minutes from the Federal Reserve's May 2-3 meeting, showing that Fed officials "generally agreed" last month that the need for further interest rate increases "had become less certain."

The lack of progress on raising the U.S. government's $31.4 trillion debt limit ahead of the June 1 deadline, with several rounds of inconclusive talks, has made investors edgier as the risk of a catastrophic default looms larger.

Treasury yields rise as investors follow debt ceiling negotiations, Fed minutes

Treasury yields advanced on Wednesday as investors monitored debt ceiling updates and weighed a summary of the Federal Reserve’s monetary policy meeting earlier this month.

Investors considered continued debt ceiling negotiations and searched for signs of progress toward a resolution.

House Speaker Kevin McCarthy said during a late-morning press conference that negotiators are struggling to agree on spending levels, but reiterated his confidence that both negotiating teams would reach an agreement.

ANALYSIS

USD/CAD: Moderate potential for further Loonie recovery – Commerzbank 

“CAD is unable to keep up; and clearly the uncertain outcome of the row about the debt ceiling is having a bigger effect than the rising rate expectations for Canada (stronger compared with the US).”

“From our point of view this entails moderate potential for further CAD recovery against USD once it becomes clear that an agreement can be reached at the last minute.”

“It cannot be excluded that the market will also see a higher likelihood of a Fed rate hike after the US debt conflict is resolved, but CAD should at least be well supported against a Dollar which remains in good demand.”

CHART

USDJPY Near Term: Upside favored

Technical View: Long position above 138.2. Target 139.2. Conversely, break below 138.2, to open 138.

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-hovers-near-2-month-high-debt-ceiling-angst-saps-risk-appetite-2023-05-24/
https://www.cnbc.com/2023/05/24/gold-trades-in-tight-range-as-investors-focus-on-us-debt-talks-fed.html
https://www.reuters.com/markets/commodities/oil-prices-rise-concerns-over-tightening-supply-2023-05-24/
https://www.reuters.com/markets/us/futures-dip-debt-ceiling-talks-drag-2023-05-24/
https://www.cnbc.com/2023/05/24/us-treasurys-investors-watch-debt-ceiling-talks-economic-reports.html
https://www.fxstreet.com/news/usd-cad-moderate-potential-for-further-loonie-recovery-commerzbank-202305241407