Markets await a resolution to the political standoff over the US government debt. However, focus is gradually shifting towards the Federal Reserve's decision on interest rates at the June meeting.
James Bullard mentioned in his speech last Monday the need to increase the key interest rate by 0.25% to 5.50%, while his colleague, Neel Kashkari, was not specific on how much rates should be raised at the June meeting. All this is related to the warnings Treasury Secretary Janet Yellen gave earlier, when she said that if opposing parties fail to reach an agreement on raising the debt ceiling, a default on government debt could be declared on June 1.
The increasing number of pessimists in the market is vividly demonstrated by the dynamics of the Treasury bond yield, wherein the yield of 10-year notes has broken out of a prolonged consolidation phase, standing at 3.728%. Most likely, it is the growing risk of default on government debt that is scaring investors, so many started selling off Treasury bonds. This is not surprising because if a default is really declared, the US will not be able to pay its debts, leaving investors holding these obligations with nothing. Demand for company stocks will also decrease, while demand for safe-haven assets, primarily gold, can be expected.
As long as there is uncertainty over the resolution on government debt and Fed monetary policy, it is likely that dollar will fluctuate within the range of 101.00-105.00 on the ICE index. Its movement will largely depend on whether the debt ceiling will be raised or default will be declared, as well as if the Fed decides to raise the key interest rate by 0.25% to 5.50%.
If a default is not declared and interest rates do not climb, dollar will resume its decline. In this case, the ICE index may fall to the lower boundary of the range at 101.00-105.00. But if the opposite happens, the index will rise above 105.00.
Forecasts for today:
EUR/USD
The pair is currently trading at the level of 1.0790. If it breaks below this level, particularly in light of negative business activity (PMI) data in the US, a decline towards 1.0700 will be seen.
GBP/USD
The pair is testing the level of 1.2390. A decline in business activity in both manufacturing and service sector in the US will certainly push the quote down to 1.2340.