A combination of US debt ceiling jitters, evidence that the US consumer was actually more resilient than expected, and mildly hawkish commentary from Fed members supported both Treasury yields and the dollar this week. While broad dollar price action dominated, there were a number of idiosyncratic developments too. In DM markets, interest rate expectations were adjusted in Canada, the UK, and the eurozone. In Canada, a hotter CPI report in April led markets to price in a greater probability of an insurance rate hike at next months meeting, which we think is now more likely than not. Meanwhile, as we had expected, pricing of the BoE’s hiking cycle came down on improved labour market data. Market expectations of the ECB are also now aligning with our terminal rate view of 3.75% after another barrage of hawkish communications. In EM markets, ZAR and TRY yet again stole the show, with the former exhibiting elevated volatility still while the lira continued to slide ahead of the second round in the Presidential election. Next week, the same themes look set to dominate. Debt ceiling concerns will be the primary topic as Congressional leaders have promised a bipartisan bill is likely to be presented to the House, while monetary policy decisions out of New Zealand, South Africa, and Turkey all have the potential to surprise markets.
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Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst
María Marcos, FX Market Analyst
Nick Rees, FX Market Analyst