Market sentiment improves on hopes for the rise of US debt ceiling

The USD index edged higher yesterday, indicative of the strengthening of the greenback against its counterparts. US fundamentals and especially hopes for some progress in the negotiations of the White House with Republicans about a rise of the debt ceiling, tended to provide some support for the USD and with the exception of JPY which tended to experience safe haven outflows, volatility in the FX market tended to remain at rather low levels. Yet at this point we note that Japan’s trade data for April tended to be a bit worrying as despite the trade deficit narrowing more than expected, the export and import growth rates also slowed down and drop into the negatives respectively, which could be perceived as sign of slowing economic activity for the month, an indication especially crucial for the export-oriented Japanese economy. Attention now turns to the release of Japan’s CPI rates for April tomorrow during the Asian session and should the rates accelerate, we may see the Yen bears hesitating as that may increase the pressure on BoJ to modify its ultra-loose monetary policy settings.

USD/JPY continued to be on the rise yesterday aiming for the 137.55 (R1) resistance line. We tend to maintain our bullish outlook as long as the upward trendline guiding the pair since the 11 of May remains intact. Should the bulls maintain control over USD/JPY, we may see the pair breaking the 137.55 (R1) resistance line and take aim for the 140.65 (R2) resistance hurdle. If the bears take over we may see the pair reversing course, breaking the upward trendline as a first sign of a trend reversal and aim if not breach the 135.15 (S1) support line. Headlines for the negotiation regarding the rise of the US debt ceiling tended to be characteristic as they noted that Biden and McCarthy pushed forward for an agreement on the issue. The improved market sentiment also supported riskier assets such as equities and its characteristic that Dow Jones rose about 400 points but also Nasdaq and S&P 500 were in the greens for the day. As for financial releases we note that US housing data for April tended to be a bit disappointing especially the drop of the building approvals figure, which tended to highlight the difficulties being faced by the sector.

Back in the FX market, we note the worse-than-expected employment data for April in Australia as the unemployment rate rose to 3.7% and the employment change figure dipped into the negatives. The release tended to weigh on the Aussie early this morning as the data may cause RBA to ease its hawkishness. AUD/USD took another swing at the 0.6640 (S1) support line, which for the time being seems to be holding its ground. For the time being, we tend to maintain a bias for the sideways motion to continue, yet also note that some bearish tendencies seem to be present as the RSI indicator remains between the reading of 50 and 30. For a bearish outlook we would require the pair to break the 0.6640 (S1) support line clearly and aim for the 0.6675 (S2) support level. Should the bulls take over we may see the pair reversing course aiming if not breaking the 0.6700 (R1) resistance line. In the UK, according to the Financial Times yesterday, BoE Governor Bailey for the first time noted that the UK economy is dealing with a wage-price spiral and also stated that the bank is to raise interest rates as far as necessary, yet also he underscored the bank’s expectations for inflation to drop sharply. Please note that BoE Governor Bailey is to speak before UK lawmakers today and may grab pound trader’s attention.

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During today’s European session, we get the Czech Republic’s PPI rates for April while on the monetary front, we note that ECB Vice President De Guindos, BoE’s chief economist Pill and ECB President Christine Lagarde are scheduled to speak. In the American session, we note the release from the US of the weekly initial jobless claims figure, May’s Philly Fed Business Index and April’s Existing Home Sales for April while we also note that Fed Board Governor Jefferson, Fed Board Governor Barr and Dallas Fed President Logan are scheduled to speak. During tomorrow’s Asian session, we note the release of New Zealand’s trade data for April and UK’s GfK Consumer Confidence for May.