The Takeaway: The dollar will continue to appreciate against the euro.
The United States is moving closer to suspending its debt ceiling with legislation having passed yesterday in the U.S. House of Representatives now heading to consideration in the U.S. Senate.
The NADEX weekly contract for the EUR/USD closes in one day and four hours. The exchange has calculated a .50 probability at the time of this writing that the EUR/USD will close at 1.0725.
Personally, I estimate that the EUR/USD will close at or above 1.0713 when the weekly EUR/USD contract closes on the NADEX.
The unemployment report is due out tomorrow at 8:30 am. If labor has been able to get increases in wages along with the unemployment remaining the same or inching down, I expect these potential inflationary pressures to be reflected in the interest rate decisions later this month by the Board of Governors of the Federal Reserve System.
On the flipside, the CME Group’s FedWatch Tool is reporting that 71% of its survey respondents expect the federal funds overnight target range to remain at its 5.00% to 5.25% target range. Traders apparently expect little impact on the overnight rate from unemployment or the debt ceiling banter.
If there is an increase in average wages accompanied by a year-over-year inflation rate of 4.4%, as reported by the U.S. Bureau of Economic Analysis’ personal consumption expenditure index, I don’t see why the markets would expect a pause by the Board of Governors in raising the discount window and interest on reserve balances rates and changing its federal funds overnight target range.
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Circling back to the debt ceiling, a suspension of the debt ceiling to January 2025 greenlights an uptick in the interest rates paid on the bonds necessary for raising additional funding and for replacing maturing Treasurys. I expect the dollar to continue to strengthen but I do not know by how much.
As always, please share your thoughts on this analysis.
Alton Drew
1 June 2023
The Stats …
30-Day Federal Funds Futures and Options: 94.955
Effective Federal Funds Rate: 5.08%
Discount Window Rate: 5.25%
Interest on Reserve Balances: 5.15%
EUR/USD=1.0713
USD/JPY=140.5300
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Alton Drew
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