Weekly Focus: The Debt Ceiling Deal is Settled

The weekend brought some good news to the market, as a bipartisan agreement on the U.S. debt ceiling was reached. The deal should be approved by Congress on May 31. Although this is merely a formality, some Republicans from the Donald Trump group may throw a spanner in the works. Politicians may allow some time for debate after U.S. Finance Minister, Janet Yellen, “rescheduled” the default deadline for June 5 from June 1, as announced earlier.

Investors are now focusing on the actions of the Federal Reserve (Fed) as the meeting of the monetary watchdog on June 13-14 is nearing. High inflation continues to trouble policymakers as the Private Consumer Expenditures Index (PCE) increased to 4.4% year-on-year in April vs 4.2% in March. This indicator is focused on internal, more long-term factors of inflation as it excludes volatile food and energy prices. It is closely monitored by the Fed in its decision-making. As inflation is gaining momentum, chances of another interest rate hike in June are increasing over 50%.

Anyway, the U.S. Economy is seen to be extremely overheated. This could be seen from the reaction of the debt market. If short-term (monthly) Treasuries yield roll back from their high on Tuesday, while U.S. 10-year Treasuries continue to hover around 3.7%-3.8%, that would mean investors believe the Fed will continue to increase rates.

Fitch Ratings actions should also be monitored after the rating agency put U.S. sovereign rating on review with a negative rating watch. Similar actions were taken by the Standard &Poor’s rating agency in 2011, which hammered stock markets.

Technically, the S&P 500 index has an upside formation with moderate targets at 4230-4330 points, that have already been met. This dramatically limits any upside potential, while there is plenty of room for the downside. The nearest downside targets are at 4130-4150 points.

The oil market is struggling to avoid prices plummeting towards $70 per barrel of Brent crude. However, the recession scenario chances are high in the oil market as Brent crude prices continue to tumble towards $40-60 per barrel, which is the recession target. Prices are trying to move to the $67.00-69.00 level per barrel. Once they breakthrough this level they may accelerate further down. However, this will largely depend on the efforts of the Organisation of the Petroleum Exporting Countries and its allies, known as OPEC+, to stabilise prices. The OPEC+ will meet at the end of this week.

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed and bullion prices dropped to $1940. Short positions were opened after prices tested the $1970-1980 former support level with targets at $1880-1900 per ounce.

The Greenback has paused its strengthening and may resume its rally on Tuesday once the long weekend will be over in the United States. The upside momentum could be restored after the debt ceiling deal is settled. An expected deficit of Dollar liquidity may also contribute to a stronger Greenback. So, EURUSD short trades are intact with low priority. Thus, short trades for EURUSD opened at 1.06700-1.07200 should be closed at the 1.06000-1.06500 area.