Forex Today: Debt limit deal faces hurdles; key events ahead for the Aussie

A busy calendar lies ahead, focusing on Australia, inflation data and RBA Governor Lowe's testimony. Japan will report industrial production and retail trade data. Chinese PMIs and the New Zealand ANZ May Activity Outlook are also due. Later in Europe, attention will turn to French and German inflation data. The debt ceiling drama remains unresolved, and Wednesday is supposed to be the day of the Congressional vote.

Here is what you need to know on Wednesday, May 31: 

The debt ceiling deal between US President Biden and House Speaker Kevin McCarthy is facing hurdles and weighing on market sentiment. US stocks finished mixed, and Treasury yields dropped sharply.

The US dollar posted mixed results, affected by lower yields, while at the same time, commodity and emerging market currencies were influenced by risk aversion. Consumer confidence in the US dropped in May but less than expected. The focus on Wednesday will be on the debt ceiling, and then, if Congress delivers, attention will turn to employment data. Many Federal Reserve officials, including Harker and Bowman, are scheduled for public appearances on Wednesday, and the central bank will publish the Beige Book.

Analysts at Wells Fargo wrote:

Consumer confidence slipped slightly in May, and while the weakening may reflect short-term worries about the debt ceiling, the more interesting developments reveal how the sand is shifting under consumers' feet. Worries about the labor market are growing as buying plans dry up.

EUR/USD finished higher, above 1.0700, after hitting a fresh monthly low at 1.0670. Spain released lower-than-expected inflation numbers. Germany and France will release inflation data on Wednesday. Another decline in annual rates could soften European Central Bank tightening expectations.

GBP/USD climbed from under 1.2350 to 1.2440 amid expectations of more tightening from the Bank of England (BoE). The EUR/GBP tumbled to 0.8628, the lowest level since mid-December.

The yen outperformed after the announcement of an emergency meeting between the Ministry of Finance, the Bank of Japan, and the Financial Services Agency,  also favored by the decline in government bond yields. USD/JPY dropped below 140.00 and held a bearish bias.

USD/CHF hit two-month highs at 0.9082 and then pulled back modestly. Switzerland reported 0.6% Q1 growth, but the KOF Leading Indicators plummeted from 96.1 to 90.2 in May. Retail sales data is due on Wednesday.

AUD/USD failed to break above 0.6550 and pulled back towards 0.6500. The Aussie remains under pressure ahead of a busy Asian session, with Reserve Bank of Australia (RBA) Governor Lowe appearing before a Senate Committee and monthly inflation data. Next week is the monetary policy meeting.

USD/CAD moved sideways around 1.3600, despite the decline in crude oil prices. The WTI barrel lost more than 4%, falling below $70.00. Canada will report March growth numbers.

NZD/USD dropped marginally on Tuesday, posting the lowest daily close since November but remaining above 0.6000. The ANZ Activity Outlook and Business Confidence are due on Wednesday.

It was a positive day for Gold which finished higher after hitting fresh monthly lows. XAU/USD settled near $1,960, offering signs of stabilization. Silver retook $23.00. Cryptocurrencies rose, with BTC/USD gaining 0.45% to $27,800 and Ethereum gaining 0.60% to $1,905.

The Turkish Lira fell sharply again following the victory of Erdogan in the presidential runoff. USD/TRY climbed almost 2%, reaching a new record high at 20.40.