Trading insight: Inflation is too high; US politics and the fairy tale of a no debt deal

Market Talk

Traders welcome increased volatility as financial markets enter a new period of increased economic uncertainty?

Mixed USD signals or clear communication?

• On Friday the US Fed Chairman said that “inflation remains too high” and that “not doing anything would bring great social cost”.
• At the same time, financial media is “promoting” the case that the Fed will pause rate hikes.
• So will the Fed hike rates again in June?
  
  From the tone of the Fed boss, it seems likely but not certain. Hence, increased market volatility projected for the coming weeks.

ECB appears to have a more clear path

• European Central Bank (ECB) boss Mrs. Lagarde recently said that “more ground to cover to tame inflation”, this is a more clear signal that the ECB will be hiking rates further.

US debt ceiling talks to start today between US president and politicians

It's a circus, what else can you say:

Not raising the US debt ceiling will be a complete catastrophe, not only for the US financial markets but global financial markets as well. Imagine what will happen to every central bank in the world and every financial institution, every pension fund in every part of the global economy holding US government bonds, the “safest” and most liquid financial asset, and the US government going into a default on these.

Nobody wants that.

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Today’s economic calendar

Source: Tradingview / J. Knobel May 22 2023 6:48 UTC

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Technical Commentary

• Brent Crude Oil price remains weak in the face of the US debt ceiling “crisis” and reduced demand from China concerns. Current price $74.90 and down -8.25% during the last 30 days. Further downside prospects on a break below the $73.50 key support, while any upside could be capped (limited) to $77.60 - $78.75 (see chart 1).

• USD/CAD breaks above its 40 day moving average (see chart 2); current price 1.3511. Provided price can remain above the 1.3490s, the prospects for further gains remain on the table. Downside risk seen below the 1.33 key support.