Financial Markets’ Weekly Recap, May 15-19

After last week’s stalemate, US president Biden on Sunday said he believes he has the authority to use the 14th Amendment to unilaterally address the debt ceiling, but acknowledged potential legal challenges could still lead to default. He said he is looking at the 14th Amendment as to whether or not we have the authority, but the question is, could it be done and invoked in time that it would not be appealed and still default on the debt? This is an unresolved question.

ECB

Hawkish talk from European Central Bank (ECB) officials failed to support the Euro. GBP/USD ended the week hovering around 1.2450. The UK will report on inflation with the annual rate of the Consumer Price Index (CPI) expected to rise from 1.0% to 1.4%. The Japanese yen was among the biggest losers despite Friday’s recovery. Rising government bond yields in the US and Europe, and improving market sentiment boosted USD/JPY above 138.00, a level not seen since November 2022.

Forex

The US Dollar Index (DXY) rose for the second consecutive week despite improving market sentiment. Treasury yields rose sharply during the week, reaching monthly highs. Market participants pared back their bets on Federal Reserve (Fed) rate cuts.

During Powell’s remarks, the US dollar fell as traders raised their bets on rate reduction by year’s end and lowered their forecasts for rate hikes at the June FOMC meeting. The USD/JPY fell from 138.60 to 137.40, the USD/EUR increased to 1.0820, and the US Dollar Index fell to 103.000.

AUD/USD finished the week flat after testing 0.6600 following Reserve Bank of Australia (RBA) minutes and employment numbers. The Aussie lagged, with AUD/NZD posting the lowest close since December. NZD/USD erased last week’s losses and climbed towards 0.6300, rising back above the 20-week SMA. The kiwi was among the top performers of the week. On Wednesday, the Reserve Bank of New Zealand (RBNZ) will announce its decision on monetary policy, with a 25 basis points rate hike expected.

USD/CAD continues to move sideways between 1.33 and 1.36 and is about to post another weekly close near the 20-week SMA at 1.3500. The CAD outperformed on the back of higher-than-expected Canadian inflation data.

Commodities

Gold dropped significantly but ended far from the lows, offering hope for the bulls. The Gold Index (XAU/USD) found support at $1,950 and rebounded toward $1,980 after Powell’s comments on Friday. Silver posted modest weekly losses, finding support at the 20-week SMA.

Crude Oil

On Friday, WTI crude was attempting to correct but was still down for the day while the price stabilized at about $71.85 for the weekend. Given that money manager activity in the oil market is at least at a decade low, the positioning set-up in energy markets remains extremely supportive of the medium-term outlook.

Given that demand data continues to outperform forecasts, analysts claimed that there are sizable capital inflows into the industry as fundamentals start to tighten in the second half of this year. While physical markets continue to clear out the inventory glut, over the near term, lower liquidity continues to whipsaw trend followers, with poor sentiment keeping a lid on prices.

How Hawkish Is Fed’s Stance?

On Friday also, Fed’s Jerome Powell stated that the US recent banking crisis has lessened the need to raise interest rates since it has resulted in tighter credit standards. “Our policy rate may not need to rise as much as it would have otherwise,” Powell continued. In relation to market expectations, Powell stated that the rate path that markets are pricing in differs from the one that the Fed has predicted. “The risks of doing too little versus doing too much are becoming more balanced,” Powell said.

What to watch this week:

The May PMIs’ early estimates will be made public by S&P Global on Tuesday. In general, commercial activity in Europe and the US is forecast to have slowed down, albeit the predicted decline appears moderate.

The Federal Open Market Committee (FOMC) Meeting Minutes, which may provide some insight into upcoming Fed activities, will come under the spotlight on Wednesday.

The US will announce the final Q1 GDP estimate on Thursday, which is anticipated to reflect an annualized growth rate of 1.1%. The US will finally release the Fed’s preferred inflation indicator, the Personal Consumption Expenditures (PCE) Price Index, on Friday.