The week ahead will be dominated by nothing but US debt ceiling talks as the main focus.
This is the drum that I would expect financial market sentiment to beat to throughout the week. Especially as we edge nervously closer to the June 1 deadline where the United States might run out of money. Former Fed Chair and current Treasury Secretary Janet Yellen has referred to the prospect of the U.S defaulting as catastrophic.
As things stand, traders have not necessarily priced in an outcome that the ongoing pantomime in Washington could go down to the wire. The clock is fast ticking. This means that markets are in line to encounter a nervous atmosphere as the week progresses with no resolution. This means a potential risk-off atmosphere is possible. As such, we can expect world markets and assets associated as risky such as Oil and emerging markets to trend weaker. On the other hand, the US Dollar and Japanese Yen are the prime contenders of assets of safety that traders will look for.
This situation over the debt ceiling in the United States can very much still be classified as pantomime. The will they / won’t they question should ultimately lead to a resolution to the debt ceiling being found. Neither the Republican or Democratic party can afford to be blamed for the unbelievable global uproar the U.S running out of money would create. This is especially the case as we head into a year of United States Presidential Elections as the major event in 2024.
The overall global financial markets view is that the United States will avoid defaulting.
Fed official comments to help EURUSD?
The trend of selling the Eurodollar from last week is in line to hopefully pause. Comments from the Fed on US interest rate policy expected via the latest Fed Minutes release are the key event risk.
This week will see the latest Fed Minutes released. Investors will be hoping for clarity from the Federal Reserve on the future outlook of US interest rate policy. Comments indicating that the Fed is concerned about the aggressive pace of US interest rate increases can send the USD lower. Potential impacts to the economy over the longer-term or confirmation of no more US interest rate hikes can weaken USD momentum.
What can also help the EURUSD plant its feet at 1.08 is expectations for a divergence in monetary policy. This might actually be emerging in the ECB’s favour after years of the scale being tipped in the direction of the Fed. Hawkish comments from the likes of ECB President Christine Lagarde can present a helping hand to Eurodollar buyers.
However, we must take into account that a flurry of bids for the US Dollar should investors become nervous about the debt ceiling can send the EURUSD sharply lower in a blink.
USDTRY to find 20 imminently
It appeared to be only a matter of time once it was confirmed that the Turkish Presidential Elections would face a second round. USDTRY is in line to find 20 at any moment.
This would mean that the Turkish Lira has weakened to 20 against the US Dollar for the first time ever. Another record-low for the Turkish currency is imminent. The reasoning behind the Lira reaching new all-time lows is because traders are pricing in the prospect of Erdogan staying in power.
Along with many other matters, the Turkish President has made public comments on central bank policy for years. This has included clear evidence of central bank independence being breached and central bank governors suddenly replaced. Such events will continue should there be no change in President. This explains why the Turkish Lira continues to find new record-lows.
The Lira has weakened by more than 340% against the US Dollar over the last five years. USDTRY was valued at 1.85 as of 24 May 2013. This means it has lost more than ten times its value in ten years.
This should be remembered as a lesson in textbooks for economic students for years to come. Providing a recent case study on what impact central bank independence fears can have on your currency is the lesson.
Think twice before expecting Gold to rally on debt ceiling updates
The prospects of the United States defaulting are naturally bullish for Gold over the longer-term. Yet, potential nervous updates before the June 1 deadline will not necessarily lead to Gold aiming higher. Especially if the USD also surges.
Even though both Gold and the US Dollar are very much assets of safety, Gold is denominated in USD. Previous flashes of sudden rallies for the Greenback have unexpectedly been bad news for Gold.
The US Dollar move higher as a result of concerning headlines from Washington is a threat for Gold.