By Jameel Ahmad, Chief Analyst at CompareBroker.io
From an economic data perspective, the main focus on Tuesday is the flash PMI readings from across Europe.
The looming shadow in the background is the cautious sentiment encouraged by the ongoing standoff in Washington when it comes to the debt ceiling talks. There may very well be fatigue in news headlines already, but the negotiations are dominating everything.
Investors still refuse to realistically price in the prospect that the United States will run out of money within ten days. This is because everyone is in on the act and aware that what is taking place in DC is just a political drama.
That being said, it is not helpful to sentiment and the situation overall is bringing more uncertainty to the mind of investors when they are already puzzled over more than enough matters. Issues lacking clarity include the future outlook of interest rate policies and whether inflationary pressures will ease over the second half of this year.
It would not be a surprise if the repeat of comments from former Fed Chair and current Treasury Secretary Janet Yellen that it is highly likely that the U.S. government will run out of cash by June, rings in the ears of traders on Tuesday.
This means that a cautious trading atmosphere can be expected.
Oil above $72
Oil prices find themselves stuck between a rock and a hard place when it comes to looking at potential risks for the remainder of the month.
This is because even though the debt ceiling talks and the unlikely prospect of the U.S. government running out of cash does not initially impact demand, crude oil is a risky asset to hold in a portfolio and should traders get worried as the June 1 deadline approaches, we can expect for the black gold to be one of the first items thrown out of the window.
Oil very much is and will always be considered as a risky asset and this means that the probability of a risk-off atmosphere over the coming sessions will limit how much further prices can stretch beyond $72.
From a technical perspective of price action, $70 is seen as a support cushion, but this is unlikely to stay in place for long should investors begin to get worried about the events taking place within Washington.
At the same time, the macroeconomic backdrop of waiting for data announcements to show us what the future outlook for the world economy will be, as interest rate increases filter through and we wait for inflationary pressures to decline, suggests that oil price action should not move much higher than where they currently stand.
The uncertain macro backdrop and what implications this might have for future demand for commodities such as Oil is also why we must be realistic that even if financial markets rally on the news of a breakthrough to the ongoing debt ceiling negotiations, Oil price rallies will be contained.
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