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The upward momentum of the USD continues amidst uncertainties surrounding the US debt ceiling, a relatively stable-to-weakening stock market, and increasing US yields. Speaker McCarthty expressed optimism regarding the possibility of reaching a debt agreement before June 1. The recent downgrade of the US's AAA rating by Fitch, based on fair value estimate models, may have motivated both parties to be more inclined towards reaching a consensus. The minutes from yesterday's FOMC meeting did not provide substantial guidance for the markets, indicating that policymakers themselves have a significant level of uncertainty about future actions. The issue of the debt ceiling likely influenced the language used, hinting at a potential pause in June but keeping the possibility of resuming interest rate hikes in July open. Today's schedule includes more speeches from Federal Reserve officials, while recent data on weekly claims in the US labor markets have shown some signs of softening.
The wider, sideways trading that has characterised spot movement over the past few months is still present as the CAD continues to range trade against the USD. In the past month or two, the CAD has gained some momentum on the crosses, riding the recent recovery in the USD against the majors; a slightly firmer tone has also emerged against the EUR and GBP. That could signal a modest shift in the CAD's potential relative to the USD, and we do observe that the USD/CAD is now trading at levels that are somewhat over what we would consider to be spot fair value (1.3291). This may restrict the USD's ability to rise above 1.36.
The German economy contracted for a second consecutive quarter in Q1 after contracting in Q4 according to (adjusted) GDP figures, indicating that the country entered a recession after the turn of the year. Initial projections showed little growth in Q1. Although inflation is still the ECB's major worry, weak economic dynamics won't stop the central bank from proceeding with additional rate hikes in the coming months. Softer than expected statistics have added to the headwinds facing the euro.
GBP has performed better than average for the session. The UK's energy bills are expected to drop significantly, which is good news for the pound. A 17% decrease in average home energy costs is predicted by new price cap standards, providing some relief from the pinch caused by rising cost of living.
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