Markets stay alert to the issue of the US government's technical default, which forces investors to be extremely cautious. The federal debt ceiling has already, at least over the past decades, been raised a few times by Congress. Despite the precedent, under the current difficult political and economic situation in America, the risks of the aftermath are much higher than they were before.
Of course, this fundamental background keeps all financial markets on edge. Moreover, all this is happening amid generally dubious signals generated by the American economy. But the uncertainty of resolving the crisis is likely to hang over the markets like the sword of Damocles for a while.
Why will the US dollar receive support amid the public debt discussions in the States?
In our opinion, there are several reasons for this. The main factor is the banal factor of risk aversion. By the way, the risk-off mood also boosts the demand for gold, which usually loses in value while the US dollar asserts strength across the board. The second reason lies in the expectations that, following the Federal Reserve, other global central banks will stop the cycles of rate hikes. For example, the economic forecasts of the Bank of England, which it issued last week, turned out to be notably more optimistic than the market expected, which caused a sharp drop in the sterling not only against the dollar but also against other major currencies.
In fact, a situation of equilibrium in trading forces is currently unfolding in the market. Eventually, market sentiment may take shape after the resolution of the debt crisis. The market began to realize that inflation readings in economically developed countries have already reached their minimum values. In any case, we can draw this conclusion, given the latest incoming data.
If fundamentals change, for example, the Ukrainian conflict expands, then new troubles can resurface both in Europe, the US, and in other countries and regions of the world.
In the meantime, we believe that the US dollar index may try to stay above the mark of 102.00, but most likely it will not be for long. Any improvement in investor sentiment after digesting the negatives may change the direction of the US dollar, forcing it to correct downwards.
In general, we still predict that the US stock indices will get stuck sideways. The same is true about European and Asian stock indices. The flat market will continue until the debt crisis in the US is resolved. As for the currency market, the currency pairs where the US dollar is present are likely to trade also in a range-bound way. In the meantime, both positive and negative news could hardly change the market sentiment radically.
Intraday outlook
EUR/USD
The instrument found support at 1.0845. If market participants regain some optimism, EUR/USD could extend an upward correction to 1.0900-10. From this level, the price may reverse downward and head for 1.0790 unless the US national debt issue is resolved in the coming days.
USD/CAD
The currency pair is making a downward correction after it hit a local high at 1.3660. If market sentiment improves today, USD/CAD may continue a decline to 1.3485. Nevertheless, this dynamic could change abruptly if Canada's inflation data which is due on Tuesday logs a slowdown in consumer price growth because it might assure the Bank of Canada to make a pause in rate hikes. In this case, USD/CAD could renew its growth to 1.3660.
