Isranomics

Relief rally anticipated as debt ceiling deal shifts markets’ focus to riskier assets

by | May 29, 2023 | Stock Market | 0 comments

Global markets are poised for a relief rally as US negotiators have reached a tentative deal to resolve the ongoing debt crisis that has recently weighed on risk sentiment. As trading begins this week, attention will be focused on the US dollar, which has benefited from concerns surrounding the statutory borrowing limit.

Experts anticipate that the markets will heave a sigh of relief as the debt ceiling issue is finally resolved. This could result in a slight weakening of the U.S. dollar, as the agreement appears to strike a balance between reducing spending and not harming growth prospects.

The dollar’s strength this month has topped Group of 10 peer currencies due to the uncertainty surrounding a potential US default. Given the United States’ dominant position in the international financial system, investors are traditionally compelled to seek safety in dollar-denominated assets like Treasuries despite the possibility of default. As a matter of fact, a recent survey by MLIV Pulse found that US debt was the second most popular asset to purchase in the event of a default, behind only gold.

While Treasury market investors have remained optimistic about the prospects of a debt deal, swap traders have started pricing in a quarter-point rate hike over the next two Federal Reserve policy meetings. This implies that the central bank will be able to maintain its focus on combating inflation.

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