Even though it’s widely unlikely to see a default, investors are still focused on negotiations to see if they will raise the US debt limit, which increases the market risk. While President Joe Biden and House of Representatives Republican Speaker Kevin McCarthy will meet to discuss the debt ceiling on Monday but there will still be little chance to close this topic before the very last days of May.
After Powell’s comments last week that caused a stir in markets, as he indicated that the US Central Bank might pivot towards a more dovish direction, we saw the price drop on Friday, but Monday, Fed speakers again heated the ovens. St. Louis Fed President James Bullard said the Fed may still need to raise its benchmark interest rate by another half-point this year. At the same time, Minneapolis Federal Reserve President Neel Kashkari also said it was a “close call” whether he would vote to raise interest rates or pause the central bank’s tightening cycle. FOMC members will meet next month to decide the rate hike cycle fate.
On the other hand, unlike the past two weeks when stronger-than-expected economic reports and hawkish Fed officials kept the prospect of further interest rate increases alive and helped the USD to rise, expected economic data for the week ahead are not that promising, so USD bulls’ movements can be limited this week.
Last Friday, US initial Jobless claims unexpectedly fell to 242K from 264K previously and 251K expectations. The labor market is showing signs of improvement, but still, it’s much higher than a few weeks ago, when there were less than 200K applications.
On top of that, headline inflation dropped to 4.9% annually in April, down from 5.0% in March. While the headline Inflation decreased more than expected in April, Core CPI, excluding food and energy prices, stayed at 5.5%. Still, slowing inflation increases the chances of ending the interest rate hike cycle at its 16-year high.
Later this week, US Flash Manufacturing and Services PMI data on Tuesday must be followed closely. Also, the minutes of the latest Fed meeting are scheduled to be released on Wednesday. Preliminary quarterly GDP and GDP Price Index will release on Thursday, which can provide information on the state of the US economy and can cause volatility in dollar prices. And finally, on Friday, in line with durable goods orders, the Core PCE Price Index will be one of the most highly anticipated fundamentals this week, as it is the Fed’s preferred inflation gauge.
The market condition is not so much in the USD bulls’ favor. From the technical point of view, the uptrend is facing difficulty above 103.60, but bears also have very strong support at 102.70 that must be breached before moving any lower.