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What the debt ceiling talks mean for markets

global markets
Former Fed Chair and current US Treasury Secretary Janet Yellen has once again provided a warning to investors

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The latest headlines coming from the debt ceiling talks continue to guide sentiment for markets.

The looming shadow in the background for markets is the cautious sentiment encouraged by the standoff in Washington. The debt ceiling talks that have been ongoing for weeks without leading to a resolution. Fatigue in the news is already clear, but the debt ceiling talks are dominating everything from a theme perspective.

As it stands, investors still refuse to price in the prospect that the United States will run out of money. This is because everyone is aware that what is taking place within Washington is just a political drama. With that being said, it is not helpful to sentiment. The situation overall is bringing more uncertainty to the mind of investors when they are already puzzled over enough matters. Such issues include lacking clarity from the future outlook of global interest rate policy. Whether inflationary pressures will truly ease over the second half of this year represents another headache.

US Treasury Secretary Janet Yellen has repeated that the United States government will run out of cash by early June. This will ring in the ears of traders today. Yellen is also a respected former Chair of the US central bank and investors should perhaps be reacting more to her comments.

This means that a cautious trading atmosphere can be expected for Tuesday

Oil above $72 but unlikely to climb much more

Oil prices find themselves stuck between a rock and a hard place. This will remain the case when it comes to looking at potential risks for the remainder of the month.

Despite the debt ceiling talks and the unlikely prospect of the United States government running out of cash not initially impacting demand, Oil is a risky asset to hold in an investor portfolio. Should traders get worried as the June 1 deadline approaches, we can expect for Oil to be one of the first items thrown out of the window.

Oil very much is and will always be considered as a risky asset. This means that the probability of a risk-off atmosphere over the coming sessions will limit how much further Oil prices can stretch beyond $72.

From a technical perspective of price action, $70 is looked at as a support cushion. This is unlikely to stay in place for long should investors begin to get worried about the latest headlines coming out of Washington.

At the same time, the macroeconomic backdrop also suggests that a ceiling is in place for rallies. We are all waiting for data announcements to show us what the future outlook for the world economy will be as interest rate increases filter through economies. We are also waiting for inflationary pressures to hopefully decline. Both factors suggest that Oil price action should not be able to move much higher than where they currently stand.

The uncertain macro backdrop and what implications this might have for future demand for commodities such as Oil is also why we must be realistic that even if financial markets rally on the news of a breakthrough to the ongoing debt ceiling negotiations, Oil price rallies will be contained.

Europe Flash PMIs to guide EURUSD

From an economic data perspective, the main focus on Tuesday will be the flash PMI readings from across Europe.

This might bring some change in tone for the Eurodollar, which has remained largely flat this week. At time of writing, the daily range for the EURUSD is only 25 pips. This goes to show how cautious global assets are to the debt ceiling negotiations.

Of more interesting note to technical traders will be that the Eurodollar has once again slipped below 1.08. There is a real lack of confidence from buyers in the market right now. Should the flash PMIs out of Europe show that the economy continues to underwhelm, the EURUSD can slip further.

The problem for the Euro is that it accounts for such a high extent of the Dollar Index. This means that when traders are guided towards the US Dollar, the Euro suffers the most from a currency perspective. With the Greenback still at historically strong levels, the Euro remains depressed as a result.

It can also be taken into account that matters might get worse for the Euro this week. This is even more likely to be the case should there be a breakdown to the debt ceiling talks. The Dollar is likely to surge as an asset of safety should a resolution not be found.

Not much hope for EURUSD bulls

What might bring some joy to the mind of EURUSD bulls is Wednesday’s Fed Minutes release. The market is still waiting for confirmation that the Fed is truly done with raising US interest rates. Should the Fed Minutes release suggest that this is the case, traders will have more encouragement to gradually move away from Dollar buying positions.

It would also help buying sentiment if ECB officials providing more public commentary over interest rate increases in Europe. There is a potential divergence in monetary policy than can support the Euro.

Yet, the ECB are likely to remain cautious for as long as EU economic data continues to underwhelm. Do not be surprised if Tuesday’s data suggests exactly that.

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