Between recession concerns, debt-ceiling dramas and inflation gauges, there are no shortage of reasons to explain some of the hesitancy we are witnessing on financial markets. With regards to the US debt-ceiling discussions, if history is any guide, then we will see an eleventh-hour resolution to save the day and markets will again breathe a sigh of relief. But until such time, the outside threat of a default is keeping risk assets in check. And whilst previous episodes of the debt ceiling drama may have instilled the market with a sense of complacency, the cold hard fact remains that an actual US credit default would be a seismic event for global financial markets.
Market hesitancy stemming from the unresolved debt-ceiling debate is not doing the gold price any harm. The price of gold has been ticking higher this week on safe-haven flows and expectations of falling US yields in the second half of 2023 (Fed funds futures indicate that the market expects the FOMC to be cutting rates by year end). If markets do grow more nervous as we approach the debt-ceiling deadline, and traders are looking for a place to park their funds, gold could be poised for further upside on any increased flight to safety.
Risk appetite is a little shy ahead of the CPI and PPI data due this week, because while traders are hoping the Fed is done with rate hikes for now, Jerome Powell has stressed that future policy moves will be data-dependant. So, any upside surprise on key inflation gauges this month would rattle the market’s nerves ahead of the next Fed meeting. Regarding the CPI data due Wednesday in the US, expectations are for a 0.4% monthly figure and 5% year over year. If the inflation reading comes in on the softer side this could solidify market expectations for a Fed pause in June, which would likely see US treasury yields and the greenback decline. Conversely, higher than expected inflation would likely help the USD. So, the immediate fate of the greenback has a lot riding on the inflation data this week.
The oil price shrugged off the downbeat Chinese trade data with the price continuing to stage a recovery after the recent sell-off. The WTI oil price is trading $10 higher compared to the trough it fell into last week, perhaps indicating that the demand picture is not as bad as the recent sell-off suggested (price is $73.57 now verses $63.64 low from last week). News that the EIA (Energy Information Administration) expect a rise in seasonal oil demand has soothed some fears. While the price has recovered, oil has proven to be a lightning rod for volatility of late and as such, further extreme price oscillations cannot be ruled out. Particularly as the oil price is so sensitive to global growth expectations.
In FX, Sterling is holding its ground against the USD ahead of the BOE meeting this week (on Thursday). The level of hawkishness or otherwise that we see from the central bank will impact how much upside the GBPUSD rate has from current levels. And of course, US Dollar reaction to CPI and PPI data this week will be what sets the tone for the major currency pairs.