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Positive news emerged from the recent high-level meeting between President Biden and Congress Speaker Kevin McCarthy, despite significant differences between the two sides. However, markets are pessimistic as they expected more substantial progress towards a deal. In the foreign exchange (FX) market, the dollar is strengthening as anticipated, but further appreciation is possible once there are clearer signs of progress in debt-limit negotiations. Today, the focus is less on data, and only housing numbers for April will be released, which could be dampened by the decline in mortgage applications.
The Bank of Canada's conditional pause in late January has sparked speculation that it may need to raise rates again, as the economy remains resilient and price pressures remain strong. April's CPI increased by 0.7%, surpassing expectations. From January to April, Canada's CPI has risen at an annualized pace of 6.3%. Currently, the overnight target rate stands at 4.50%, with a 75% chance of another quarter-point hike already priced in, while expected rate cuts by year-end have been reversed. The US dollar bounced off the CAD 1.3400 area yesterday, settling near CAD 1.3480. Observe the USD/CAD trends.
EUR/USD is under pressure again this morning and we stress how 1.0800 is probably a key benchmark level to gauge market sentiment about the US debt-ceiling story. We could see some support at 1.0800, a break lower could indicate the FX market moving more seriously to price in a US default. The domestic story for the euro has been immaterial and the decline is almost entirely driven by the dollar. Today, we’ll see the final print of the eurozone’s CPI figures for April and we’ll hear from a plethora of ECB speakers.
GBP has started to edge lower and we expect more downside room against both the USD and EUR. A slowdown in wage growth was one of the two pieces of information the BoE needed to pause its tightening cycle in June, the second one will be some deceleration in inflation (data out on 24 May). Several analysts are calling for a June pause, and given 20bp of tightening are priced in, there is ample room for GBP to be hit by a dovish re-pricing. There are no market-moving data releases in the UK today.
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