The FP Markets research team produce First Light News during the early hours of the European session, ensuring traders and investors are up to date in the FX space for the day ahead.

Good morning.

US Debt Ceiling and the Dollar

The latest developments saw the House of Representatives pass the bill to raise the government’s debt ceiling, in a 314-117 vote. However, before signing the bill into law, the US Senate must vote. According to Treasury Secretary Janet Yellen, the US could begin defaulting on their debt obligations as soon as 5 June.

Once the bill is signed into law, the US Treasury will look to replenish its Treasury General Account, which will essentially drain liquidity from the market. The Treasury General Account balance is now under US$50 billion and at its lowest point since late 2017 (it was at around 500 billion at the beginning of the year and will likely be a level the Treasury targets).

The liquidity drain could deliver a temporary ceiling for equities and a tailwind for the greenback. The US dollar, according to the US Dollar Index, finished May 2.5% higher, eclipsing all of April’s downside along with a large portion of losses observed in March. As evident from the daily chart of the Dollar Index, (technical) scope to navigate higher terrain until resistance between 105.82 and 105.36 is seen, an area housing the 200-day simple moving average at 105.61. As you can see, the dollar is trading a touch off recent highs at the moment.

US Dollar Index Daily Chart

(Trading View – Daily Timeframe)

US Data

US job openings, JOLTS, unexpectedly jumped to 10.1 million in April, versus economists’ estimates of 9.4 million. This followed three successive months of declines and immediately saw the dollar catch a short-term bid. Therefore, despite rising rates—all 500 basis points—this release emphasises a resilient labour market which could contribute to the Fed hiking rates this month. Therefore, released a day ahead of the government’s non-farm payrolls print, today’s ADP non-farm employment change is likely a key watch among market participants—anticipated to reach 173,000 in May, down from 296,000 in April—along with the weekly jobless claims data and the ISM manufacturing PMI release.

In other news, and a factor likely contributing to the moderate consolidation we are seeing in the buck right now, a handful of Fed speakers hit the wires: Harker and Jefferson, highlighting that the Fed could potentially skip a rate hike this month, essentially buying the Fed some time. This, of course, conflicts with the recent hawkish Fed commentary last week.

Euro

Europe’s single currency ended May on the ropes against its US counterpart, down 3.0% (its largest one-month decline since April 2022) and snapped a two-month winning streak. Euro area inflation is on the radar this morning at 10:00 am GMT+1, with YoY inflation expected to cool to 6.3% in May, down from 7.0% in April. Notably, we have also seen declines in several key European countries, including Germany and France. Markets will also welcome a speech from the European Central Bank (ECB) President Christine Lagarde at 10:30 am.

The EUR/USD is on track to record a fourth consecutive weekly decline this week. With the major currency pair comfortably south of its 50-day simple moving average at $1.0895, support at $1.0536 is calling for attention, accompanied by a 200-day simple moving average at $1.0496.

EUR/USD Daily Chart

(Trading View – Daily Timeframe)

Major Currencies as of 9:00 am GMT+1:

(Trading View)

Headline Events for the Day Ahead:

Annual Euro Area Inflation Rate (Flash) for May at 10 am GMT+1 (Expected: 6.3%; Previous: 7.0%).

US ADP Non-Farm Employment Change for May at 1:15 pm GMT+1 (Expected: 170,000; Previous: 296,000).

US ISM Manufacturing PMI for May at 3:00 pm GMT+1 (Expected: 47.0; Previous: 47.1).

Thanks for reading. Have a great day!

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