USD ignores US default risk?

The US debt crisis continues, but the currency market is ignoring it. There is no indication that the dollar reacted to the incoming information about ongoing negotiations. There is also a calm in the options market. Implied volatility is at its lowest level in over a year. It is monetary policy considerations rather than ongoing talks between US politicians that are driving the decline of EUR/USD, which fell below 1,0720 yesterday.

Still a tight sector, the economy gained momentum

Currently, the futures market is valued at over 40 percent. chances of the Fed raising interest rates by 25 basis points. The scale of reductions in the second half of the year was reduced. This indicates that the expectations of market participants have changed slightly since the last Fed decision on May 3rd. At that time, any upward move in the following month was generally not taken into account.

Yesterday, we learned the weekly labor market data, which indicated that the sector is still tight. The low number of unemployment claims is in line with recent data on retail sales, industrial production and economic activity, which suggest the economy picked up momentum early in the second quarter. The lack of clear signs of a slowdown coming from the US economy allows the market to assume that the Fed will not pause after all.

Another dollar strengthening?

Less than 3 weeks until the next meeting. Today we will get the PCE core index - the Fed's preferred measure of inflation. Growth is expected at the level of 4,6%. y/y, which is the same as the month before. If the reading is lower, the dollar should fall in value, numbers higher than consensus will likely drive USD buyers, which will result in declines EUR / USD – perhaps a new local low will be set.

Next week attention will be focused on the NFP report and then the market will be awaiting the release of headline and core inflation for May. This reading will take place only on June 13, i.e. one day before the Fed decision.

From a technical point of view, the Eurodollar broke the medium-term uptrend line some time ago, which suggests that the correction in the quotes may be a bit more extensive. The key level of support for quotes is currently 1,0530 - which is the minimum from March this year.

Source: Łukasz Zembik, OANDA TMS Brokers