The Morning Update

The US$ Strengthens, oil prices extends losses, equity markets are down, and US yields ease amid debt ceiling & China caution. The US$ retests 2-month highs, equity markets came under selling pressure sparked after China's factory activity falls faster than expected in May on weakening demand. Euro fell to its lowest level since mid-March vs US$ after French inflation eased more than anticipated, reaching its lowest level in a year. In the US markets remain cautious over the US debt ceiling bill as it faces resistance at both chambers of Congress after the House Rules Committee advanced the bill by a slim 7-6 margin on Tuesday. Fed Loretta Mester said she sees no "compelling reason" to pause interest-rate increases, particularly in the wake of the debt-limit deal. Today alongside ongoing Debt Ceiling updates markets will focus on German Inflation data, EBC President Lagarde speech, US Chicago Purchasing Managers Index, Fed's Beige Book, JOLTS Job Openings, CAD GDP & Feds Harker, Jefferson, Bowman speeches will help provide intraday direction to currency markets.

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In other news. US debt ceiling deal heads towards first House vote after clearing initial hurdle. EU Pledges to extend single market benefits to Western Balkans. Jamie Dimon warns 'uncertainty' caused by Beijing could hit investor confidence. Bank of Japan policy shift risks causing eurozone bond turmoil warns EBC-FT. Wildfire in Halifax, Canada trigger evacuation of 16,000 people and leaves damaged homes. Failed N.Korea launch sparks sirens and alarm in Seoul.

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In currency news. China's CNY set for biggest monthly loss since September. Euro drops below 1.07 hitting 2-month lows as Eurozone inflation cools. AUD & NZD both drop to 6-month lows after weak China PMI data. Petro-currencies extend losses as oil prices drop more than 4% on Tuesday. CNY & Asian currencies weaken 0.4% on average vs US$. Trading currencies under pressure with NOK tumbles 0.7% AUD, ZAR & CHF weaken 0.6%, NZD & SEK fall 0.5%, JPY & MXN dip 0.1% vs US$.

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Oil prices continue under pressure down near 2%, following a 4% fall on Tuesday after weak demand and disappointing Chinese manufacturing data. C$ remains under selling pressure as the perfect storm of weakening Chinese data keeps pressure on commodity prices, stubborn US inflation expects the Fed to continue its hiking policy while CAD inflation levels remain steady and will keep the BoC policy on hold. Today sees a busy US economic docket, plus key CAD GDP which is expected to grow at 2.5% in Q1 vs flat in Q4/22. Focus will be on the US debt ceiling deal and CAD GDP to help provide intraday direction.

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EURCAD holds near 2-month lows and looks like we could see further Euro weakness if we see German Inflation data follow lower Spanish & French inflation levels which sets the stage for a less hawkish ECB.

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EUR breaches 1.0700 amid waning risk sentiment and falling inflation levels. Weaker than expected China manufacturing PMI data raised concern on falling global demand. Domestically softer Spanish and French inflation levels is setting the stage for the German inflation report today and the expectation that the ECB will change its hawkish tone and pare back ECB rate hike bets. Today sees a busy US economic docket, as well as the US debt-ceiling deal facing a Congress vote before proceeding to the Senate ahead of the June 5th deadline. We expect to see markets remain cautious which will add further pressure to the Euro leading to a potential test of 1.0600 this week.

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GBPEUR advances towards 5-month highs as markets expect a widening interest divergence between the BoE & ECB as European inflations fall more than expected.

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GBP pares Tuesday's gains amid increasing waning risk sentiment. The pound came under selling pressure on the combination of disappointing Chinese manufacturing data, increasing safe-haven US$ buying and increasing hawkish Fed rhetoric. The pound vs US$ looks vulnerable to further short term weakness with the potential to weaken towards 1.2200 last seen in March. The Pound vs Euro is expected to extend gains to a possible retest 1.1650 last seen in December on the potential of widening interest rate gap between the ECB & BOE. Today US economic release, BOE Mann's speech and US debt ceiling updates will provide intraday direction to the pound.

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