After US President Joe Biden and Republican leader in the US House of Representatives Kevin McCarthy reached an agreement on the US debt ceiling at the end of last week, market sentiment clearly improved, showing an increase in demand for risk assets on Friday. The trend continued on Monday in European trading, while the US was celebrating Memorial Day.
Now investors hope that this agreement will be ratified by Congress. In light of this, futures for major US stock indices are steadily growing. Also, for the second day in a row, US Treasury yields have been noticeably declining, indicating a significant drop in market tension. Thus, the benchmark yield of 10-year Treasuries has fallen to 3.725% at the time of writing after reaching a local high of 3.859% on Friday.
In fact, investors have no doubt that the national debt limit will be raised, which may become the basis for a limited rally in the equity and commodity markets. However, the US dollar shows almost no reaction to these positive changes.
What is the reason behind such a behavior and what should we expect this week?
We believe that such a neutral dynamic of the US dollar is explained by the growing uncertainty about what rate decision the Fed will make on June 14. Just recently, market participants had great confidence that the regulator would pause rate growth at the June meeting and then may stop the cycle of raising rates altogether. However, after the publication of the latest inflation data, it became clear that the probability of raising interest rates has increased. The indicators showed that inflation was declining at a slower pace, and the US central bank cannot ignore this fact.
Such fears are reflected in the movement of futures on federal funds rates. Thus, only 40.5% of investors believe that the rate will remain unchanged in the range from 5.00% to 5.25%. At the same time, the expectation of a rate increase by 0.25% to a range of 5.25% to 5.50% has risen and currently stands at 59.5%.
As the outcome of the Fed meeting stays unclear, we can expect the US dollar to maintain its overall trend against a basket of major currencies. On Friday, we can expect sharp movements in the market due to the jobs data release in the US, but they are likely to be limited.
EUR/USD
From the technical viewpoint, the pair looks oversold. It found support at 1.0700. Its rise above 1.0750 could lead to a more significant advance towards 1.0830 unless market sentiment worsens.
GBP/USD
The pair broke above the level of 1.2400 amid growing expectations that the Bank of England will raise the key interest rate at its June meeting. Based on this, we can assume that the pair will continue to rise towards 1.2510.
