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US debt ceiling negotiations in focus for next week

Commentaries & Views

Ongoing concerns over the United States banking sector appeared to contribute to the mixed trading sessions for global markets yesterday as we head into the final trading day of the week today. Focus should now begin to shift towards the US debt ceiling negotiations for the main headline risk heading into next week. Former Fed Chair and current United States Treasury Secretary Janet Yellen has of course made it clear on a few occasions now that the United States will not be able to pay its bills by June 1 in the event that the ongoing political gridlock is not resolved.

Political gridlock is the key term to take away because the situation of the United States debt ceiling has always been exactly that. The debt ceiling has become such a seasonal issue in headlines that no one is really pricing in a realistic probability that the largest economy in the world will actually default. The can will eventually be kicked down the road for a later date, where this issue will once again return to headlines months from now after a temporary resolution is found.

As the market is not getting any clues from Fed policymakers regarding interest rate policy and specifically, when the US central bank might start entertaining lower interest rates a negative undertone can take place in regard to trading global markets.

Data releases such as the monthly inflation report and employment report from the United States over the last week has allowed the Federal Reserve to bide its time before communicating to the market what is next for interest rate policy.

GBPUSD approaches 1.25 in aftermath of BoE decision

Admittance coming out of the latest Bank of England interest rate decision, where interest rates were raised for the 12th successive time to stand at levels not seen in close to 15 years that inflationary pressures will remain persistently high for the UK economy has taken the buzz out of buying the British currency.

The crux of the matter remains that the UK central bank have been too conservative to react to the impending inflation crisis that everyone knew was coming. As the language used yesterday did not suggest UK interest rates should be raised more aggressively over the short-term, which in comparison to what has happened in the United States appears to have softened inflationary pressures in the States as a result, we are preparing ourselves for inflation woes for the United Kingdom to remain a dominant theme to economic fundamentals throughout the rest of 2023.

On a technical level in terms of price action, GBPUSD remains marginally above 1.25. This is a key handle to watch because a break below 1.25 will likely encourage technical analysis enthusiasts to price in further declines for the British currency. This has been a change to sentiment for this asset as it appeared that 1.27/1.28 was in sight for traders just days ago.

USDZAR breaks through 19

The outlook for the South African Rand has taken a turn for the worse after USDZAR punched its way through 19 for the first time since global markets were ripped apart by the shock of world lockdowns in the face of the pandemic April 2020.

South Africa’s economic fundamentals have regrettably underperformed for years. Headlines that South Africa supplied weapons to Russia have caught the eyes of Washington, meaning that geopolitical risk concerns have also needed to be priced in the Rand.

It has started to appear more likely than not that the currency of South Africa will soon find itself at an unfortunate milestone of hitting a new record low imminently.

$2,000 must hold for Gold

Despite Gold prices flirting with an attempt to challenge record-levels just two days ago, traders have decided to take profits off the table at the end of the week.

The price action in Gold appears to be based on technical levels rather than a tangible change of sentiment. For as long as Gold can successfully defend $2,000, which was only weeks ago a crucial ceiling of resistance, as support, the outlook for the precious metal remains upbeat.

Oil clinging on to $70

While the narrative provided by central bank officials and data is starting to become optimistic that painful recessions can be avoided, economic momentum is underwhelming and the price action in the Oil space suggests that traders are once again returning to the theme of pricing into this commodity that demand will remain weak for a potential prolonged period.

Oil does need to hold onto $70 otherwise sellers might find encouragement to attack and send price into the mid-60’s in a flash.

We are not expecting the likes of OPEC or Oil-producing nations to verbally intervene and stabilise the price outlook quite yet, but it would not be a surprise if this were to transpire heading into next week.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.