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US debt ceiling standoff leading USD higher?

Commentaries & Views

As we approach the second half of the month, trading sentiment for global markets from a theme perspective appears to be in line to be dominated by US Debt Ceiling negotiations. Although some optimistic headlines have come through following talks last week, there is no tangible breakthrough to the political gridlock and the clock is ticking. If the pantomime is on full show and it appears that the largest economy in the world might have the slightest chances of defaulting, investors will have no options but to start pricing this into the market. As it stands, this event as unlikely as it would be to transpire has not yet been factored into risk premiums.

Of note, the US Dollar did strengthen notably against many of its peers last week. It might be that the improved buying sentiment for the Dollar is linked to concerns over the debt ceiling although investors are not so sensitive to this event risk, considering how accustomed we have become to debt ceiling standoffs over the years. Concerns over global economic momentum are a more likely reason for USD strength, especially as economic data releases from China suggest that the Chinese economy is not showing the continued signs of performance that many would have hoped for following protracted Covid lockdowns.

The perspective to take here is that although the United States economy very much has its own issues, the Dollar remains the ultimate asset of safety for global investors during times where sentiment is lacking conviction. Recent data from a fundamental point of view does also suggest that the United States economy is managing to handle the fastest pace of interest rate increases in decades, which is not a trend that we can say with confidence will be on show elsewhere.

As we begin to prepare for a scenario where debt ceiling negotiations go down to the wire, it is very much probable that improved demand for the Greenback as an asset of safety will persist. Equity markets and world stocks are vulnerable to further adjustments lower. The outlook for Gold will remain further supported should the prolonged debt ceiling negotiations lead to an image that the United States will drive its car on empty fuel for as long as it can once the June 1 deadline approaches.

Of particular note, both the EURUSD and GBPUSD have slipped through near-term technical support handles that suggest further selling is in line. The Eurodollar has slipped through support at 1.09 after multiple failures of a successful break above 1.10 in recent weeks. Unconvincing data from China leading to strength in the USD will impact the Euro, and if this trend continues its gradual ascent higher through 2023 so far could very much be retraced.

The GBPUSD is also at risk to further suffering after falling through the net at 1.25. Clearly the Pound has suffered in the aftermath of the Bank of England meeting last week, where the narrative is very much that inflationary pressures are going to persist at a higher level than anyone would have hoped. With the BoE taking a much more conservative stance to interest rate increases than it could do under such inflation threats it would not be a surprise for Sterling to continue to fall. The technical picture for the Pound has been altered as it appeared just one week ago as if 1.27/1.28 was in sight and now just one week later, 1.22 is more likely.

Aside from the US Dollar, the asset that would hypothetically benefit the most from US Debt Ceiling negotiations going to an uncomfortable place for investors would be Gold. From a technical perspective we need to monitor that price action will not fall through the net at $2,000 as this will invite sellers into the picture in a hurry. As it stands and even with the USD in demand, Gold has commenced the new trading week once again above the $2,000 handle. Its success story of 2023 very much remains in play for as long as $2,000 support is not breached.

Turkish Elections uncertainty for USDTRY ahead

Anticipation over the outlook for Turkish assets looks set to continue for a further two weeks, as we await official confirmation that the Turkish Presidential Elections of the weekend requires a second round.

The Turkish currency has depreciated dramatically over recent years due to events such as clear indications that the current President of Turkey has influenced central bank policy along with a public narrative of the need for low interest rates. This has contributed to ongoing economic challenges for Turkey.

From a fundamental perspective of an outlook for the Turkish Lira, the currency of Turkey would benefit from a change of pace through new leadership and less focus on matters such as central bank interest rate policy in a public light. However, the situation in Turkey can be considered volatile and sensitive to social events on the ground. The current President of Turkey has held senior leadership positions in the country for around twenty years, and Erdogan has a very loyal following.

Even if Erdogan was to hypothetically lose the elections, the outlook is not necessarily that the Lira will strengthen immediately. This is because of the risk of protests and other potential civil events that could present a picture of Turkey going through further uncertainty over the near-term.

As a result, I would expect there to be a likelihood that investors will prefer to stay well clear of Turkish assets until the dust clearly settles from the 2023 Turkish Presidential Elections. This could take weeks.

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.