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USD strong on US debit ceiling

Daily Currency Update

Data yesterday showed European consumer price index (CPI) met year-on-year expectations - Final and Core CPI came in at 7% and 5.6% respectively. As consumer prices account for the majority of overall inflation, this will have come as light relief to European central bank president Lagarde whom last week stressed her concern for inflation sitting too high for too long and confirmed the fight isn’t over until sufficient confidence that 2% will be reached in the medium term. The news will have changed market participant’s views on future European rate hikes and as such the EUR lost ground yesterday. GBP/EUR touched 1.1530 at the highs yesterday and EUR/USD has tested a drop below 1.0800. Bank of England governor Bailey also spoke yesterday, offering a few sound bites of note but nothing that deviated from his recent comments on the UK economy. As such, his comments didn’t seem to offer much on GBP volatility yesterday with bigger headlines elsewhere overshadowing the release – US debt ceiling.

There are a number of European bank holidays today, notably in France and Germany. Macroeconomic data comes in the form of the UK monetary policy hearing this morning and this afternoon we anticipate US unemployment claims, with Philly Fed manufacturing and existing home sales also worth monitoring. GBP, EUR, and USD volatility will likely continue today as the US debt ceiling remains in the headlines and with the expected releases holding weight on domestic currency movement.

Key Movers

USD volatility has mainly centered around the recent concerns over the US debt ceiling. Market participants await further news on the potential for a deal to lift the US debt ceiling with President Biden set to cut short an Asia trip to return on Sunday to work with Republican Kevin McCarthy on an agreement. Although an agreement looks likely, with McCarthy highlighting an end-of-week agreement could be in place, the uncertainty is causing market participants to buy safe haven currencies like the USD. Investors buy safe haven currencies at times of market uncertainty. At the beginning of May. GBP/USD was peering over 1.2600 and EUR/USD was just shy of 1.1100. Over the month, GBP/USD has fallen back below 1.2500, trading as low as 1.2420 and EUR/USD has twice tried to break below 1.0800. If an agreement is seen over the weekend, or before, we could likely see USD weakness and both GBP and EUR push higher. If not, the USD will likely remain strong.

Expected Ranges

  • GBP/USD: 1.2390 - 1.2510 ▲
  • GBP/EUR: 1.1470 - 1.1530 ▲
  • GBP/AUD: 1.8680 - 1.8810 ▲
  • EUR/USD: 1.0740 - 1.0860 ▲