Global risk sentiment improved slightly due to a tentative agreement reached in negotiations on the US government debt ceiling at the weekend. As a consequence, the rally of the US dollar index (DXY) stalled.

It was especiallt before reaching the threshold of 104.50s, and instead tended to weaken in trading earlier this week (May 29). Some other major currencies gain energy to go into defensive mode. 

The AUD/USD and NZD/USD duo each rose about 0.2 percent at the end of the Asian session. Meanwhile, the EUR/USD slump stalled temporarily in the range of 1.0720s.

US President Joe Biden and the House Speaker Kevin McCarthy said they had reached a tentative agreement on the government's debt ceiling. The deal was happened on Saturday evening local time. 

Tentative Agreement is Reached 

Biden also revealed that the deal is ready to be carried out for further discussion in Congress. The news sowed the seeds of optimism amid the specter of default that has loomed over the market for some time now. 

In addition, the America’s Treasury Secretary, Janet Yellen, "pushed back the deadline" for the resolution of the issue. Yellen has previously stated about the condition. 

She said that the U.S. government will default if Congress does not raise the current $31.4 trillion debt ceiling by June 1. However, she now pointed to June 5 as the ideal time. 

Her parties have had a positive response to risk so far on the bond deal news. It was said by Ray Attrill who is known as a a head of FX strategy at National Australia Bank.

Next Speculation is Based on the Data

Obviously this debt deal still needs to be ratified, but Ray also think the market is happy to travel on the assumption that it will be completed before the new deadline. 

If the U.S. political elite does reach an agreement to raise the government's debt ceiling, the USD will lose the safe-haven demand that contributed to its rally over the past two weeks or so. 

The dollar is currently supported by stronger economic data and increased Fed interest rate expectations. Several economic data in America released on Friday showed an increase in consumer spending and the pace of PCE inflation in April 2023. 

Personal spending grew by 0.8%, double the consensus estimate of 0.4%. Meanwhile, the Core PCE Price Index grew by 0.4% - outperforming both consensus estimates and the March increase.

25 BP rate Hike is Possible to Happen

The situation above was lifting its annual inflation rate from 4.6% to 4.7%. Given that the Fed uses the Core PCE Price Index as a reference in its policymaking, the rise in the data triggered a further increase in interest hike speculation. 

US Treasury yields jump to multimonth highs based on the release. CME's FedWatch showed an increased chance from 26% to 62% for a 25 basis point Fed rate hike in its June FOMC meeting. 

Some traders also believe the Fed can be a little more hawkish. It is especially than the conclusion of the FOMC meeting last May if the next data is supportive enough. 

Payroll Data and Average Earning are the Next Focus

Whether the dollar can sustain the rally that people are seeing now, Attril thinks that's mainly going to depend on the payrolls data, or the average earnings in Friday's payrolls report.

Besides that, obviously market participant are going to get the CPI report as well before the Fed. Elsewhere, gold safe haven assets were observed to be still trading stably within a limited range last Friday. 

The precious metal did not record much change despite efforts to negotiate US debt has been carried out. Now, investors are shifting focus to NFP data. That NFP data will be released later this week. As a result, gold was only able to record a slight strengthening at the close of trading yesterday.