Higher than expected US inflation data.

The US PCE prices index increased 0.4% for April with the year-on-year rate increasing to 4.4% from 4.2% and above expectations of 3.9%. The core index increased 0.4% compared with consensus forecasts of 0.3% with the year-on-year rate edging higher to 4.7% from 4.6% and above expectations of 4.6%.

After the latest PCE prices data, there was a further shift in Fed Funds futures with markets pricing in around a 60% chance that the Fed will lift interest rates to 5.50% at the June policy meeting.

Over the weekend, US President Biden and House Speaker McCarthy announced they had reached a provisional deal with the Republicans agreeing to raise the debt ceiling in return for spending cuts.

Risk appetite improved slightly after the debt-ceiling deal. There were still concerns that the deal could be blocked by Congress given that there is opposition to the deal from the left-wing of the Democrats and right-wing Republicans.

Higher US yield and the shift in Fed Funds rate futures have continued to underpin the dollar with the US currency posting fresh 2-month highs on Tuesday.

The latest Chinese PMI data will be released on Wednesday. Consensus forecasts are for manufacturing to remain in contraction with a slowdown in services-sector growth.

The Euro rallied at times on Friday, but generally remained on the defensive. The dollar was supported by stronger than expected inflation data and the shift in Fed expectations. EUR/USD was blocked below 1.0800 and dipped back towards 1.0700. EUR/USD dipped to fresh 2-month lows below 1.0700 on Tuesday.

Higher US yields also continued to undermine the yen. USD/JPY posted fresh 6-month highs close to 140.90 before a correction to 140.00 and it surged again to 140.80 on Tuesday.

The Swiss franc maintained a strong tone. EUR/CHF dipped to fresh 7-month lows near 0.9680 with USD/CHF below 0.9050 before a recovery to 0.9060.

Sterling was held in tight ranges with Bank of England expectations providing net support. GBP/USD found support above 1.2300, but was held around 1.2330 on Tuesday as the dollar posted fresh gains.

Commodity currencies found some relief as risk appetite improved. AUD/USD advanced to 0.6560 before a retreat to 0.6515. USD/CAD settled fractionally above 1.3600 from 1.3570 lows.

Economic Calendar