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Debt Ceiling Battle Weighing in on Negative Risk Sentiment

Miguel A. Rodriguez
Miguel A. Rodriguez
02 June 2023

As the debt ceiling agreement deadline approaches and April retail sales data in the U.S. provides hard evidence that consumers are being affected by rising prices and interest rates, shares traded lower while yields of treasury bonds rose slightly. 

Yesterday, US shares started to drop after Home Depot's earnings and sales estimate disappointed the market. After the firm lowered its annual sales projection, Home Depot lost more than 3.0%, falling to its lowest level in more than six months and weakening the Dow Jones index

Further evidence that consumers are feeling the effects of rising prices and interest rates came from data on retail sales for April. The approaching deadline for raising the debt ceiling without any deal having been reached thus far further contributed to the market's unfavorable risk sentiment. 

According to the Commerce Department, retail sales increased 0.4% in April, half as fast as forecasted (0.8% growth), and numbers from the previous month were revised downward to -0.7%. 

Related Article: Stock Speculation 

Recent data suggests the US economy is slowing down and starting to experience the aftereffects of the tighter monetary policy that started more than a year ago. Although Federal Reserve (Fed) officials dispute this likelihood and are determined to maintain high rates as long as possible, the market already expects an end to interest rate hikes and even rate decreases by the end of this year. 

Despite recent bad economic statistics, the rates on Treasury bonds, particularly those with the shortest maturities, have been somewhat rising. This is because investors are concerned that a deal to extend the debt ceiling will not be reached and that a Treasury default could be the result. Despite being extremely unlikely, there is some worry about this hovering over the market and it is a factor that is pressuring the stock markets downward while ironically driving the Dollar upward, which currently serves as a safe haven. 

Related Article: Currency Strength Meter 

Due to the stronger Dollar, the EUR/USD has corrected lower from 1.1098 and is now heading towards a support level near 1.0800, where the 100-day exponential moving average crosses. 

DMO 17.05.2023 graph.png

 Sources: Bloomberg, Reuters 






Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.