Nasdaq, Gold, US Dollar; Debt Ceiling, US PCE, Germany Ifo, UK Inflation, RBNZ, Australia Retail Sales

Global stock markets jumped while gold fell last week on rising hopes for a deal in Washington to raise the debt ceiling to avert a catastrophic default. However, some of the optimism was tempered by reports on Friday that debt-ceiling talks had reached an impasse after a White House spokesperson said serious differences remained with Republicans.

The S&P 500 rose 1.6%, while the Nasdaq 100 rose 3.5%. Germany’s DAX 40 advanced 2.3% while Britain’s FTSE 100 was flat. In Asia, the Hang Seng was down 0.9%, while Japan’s Nikkei 225 was up 5.0%. The US Congressional Budget Office said the US faces a “significant risk” of defaulting on its obligations during the first two weeks of June without an increase in the debt ceiling.

Market performance in the past week

Source data: Bloomberg; The graph is prepared in Excel.

Note: The global bond proxy used is the Bloomberg Global Total Return Unhedged IndexAmerican dollar; The Commodity Agent used is BBG Commodity Total Return; The hedge fund agent used is HFRX Global Hedge Fund Index.

Meanwhile, Fed Chair Powell left the door open for a pause in the June meeting. Powell said on Friday that tighter credit conditions mean that “our policy rate may not need to go up as much as it would have to meet our targets.” The head of the central bank reiterated that the central bank will now make its decisions “meeting by meeting”. The question for the markets is whether the pause means the end of the tightening or holding cycle, as Atlanta Fed President Rafael Bostick made clear earlier in the week. “I would say it was a pause,” Bostick said, “but the pause could be a ‘skip,’ or it could be a hold. Markets are currently pricing in a 45% chance of a 75 basis point rate cut by the end of the year.

China/Hong Kong stocks underperformed after weaker-than-expected China data, including retail sales, industrial production and fixed-asset investment, on concerns that the post-Covid recovery is losing momentum. This follows an unexpected contraction in the manufacturing sector earlier in the month amid deepening producer price deflation. However, any stimulus measures to support the economy could mitigate some of the downside risks, keeping the economy on a general recovery path throughout the year.

US debt ceiling talks are likely to dominate sentiment in the coming week. Moreover, the Fed’s talk is expected to continue through the next week beginning on Monday. Wednesday’s rate decision by the Reserve Bank of New Zealand (expected to raise the benchmark interest rate by 25 basis points to 5.5%). Also, UK April inflation data and German IFO business climate are due out on Wednesday. FOMC Meeting Minutes, German Q1 GDP, Gfk Consumer Confidence and US Q1 GDP are released on Thursday. Australia and UK retail sales data for April, US core PCE price index and durable goods data are due on Friday.

Forecasting:

EUR/USD Outlook: Euro Trying to Fight Back After Powell, US Data On Coming

The EUR/USD pair is eyeing key US economic data for guidance after a pessimistic Powell pushed the euro back above 1.08 against the dollar.

British Pound (GBP/USD) Next Week: UK Inflation and US Debt Talks Dominate

Market sentiment and price action, will be dictated by the ongoing talks regarding the US debt ceiling and recent inflation reports in the US and UK.

Australian Dollar Forecast: The Australian Dollar Confirms Range Trade

The Australian dollar had a bearish look last week but managed to recover and is now firmly entrenched in the 3 month range despite the risks in the macro environment.

JPY Weekly Outlook: USD/JPY Triangle Breakout, Key US Data Under the Microscope

The Japanese Yen extended its losing streak against its major currencies, largely driven by external factors as Treasury yields rose. Will USD/JPY continue to push higher?

Gold Weekly Outlook: A flight to safety may prompt the continuation of the bullish trend

The outlook for gold improved after debt ceiling talks stalled, Yellen warns of more potential bank mergers, and Powell talks cut interest rate hikes due to slowing credit.

USD Weekly Outlook: DXY breaks higher ahead of the Fed’s main inflation gauge

The US dollar extended its winning streak along with Treasury yields as the markets cut the Federal Reserve interest rates. Looking ahead, will the Fed’s preferred inflation measure support a major breakout for DXY?

Crude oil prospects are declining due to debt limits and recession risks, looking forward to a double top pattern

Crude oil prices may head lower in the near term, affected by recession risks and the impasse of the US debt ceiling, as the double top pattern reinforces the bearish signals.

– Text of the article by Manish Gradi, Strategist for DailyFX.com

— Individual articles written by members of the DailyFX team

Connect with Jaradi and follow her on Twitter: @JaradiManish