The dollar index rose to a two-month high on Friday, bidding to close a strong week in robust fashion as an unexpected acceleration in core PCE inflation underpinned the increased betting on further Fed tightening and left EUR/USD bulls facing technical difficulty.

A daily doji candle Friday, falling monthly RSI and price action mired below the daily cloud highlighted EUR/USD’s mounting downside risks.

Meanwhile, bulls were firmly in charge of USD/JPY, which solidified its foothold above 140, with advances toward targets above 142 likely to be determined by the prospects of 10-year U.S. Treasury yields surpassing key levels that traded before the regional banking crisis around 3.9% and 4.0%.

With markets focused on Washington, the White House and congressional Republicans sought to put the final touches on a deal to raise the U.S. government's $31.4 trillion debt ceiling for two years while capping spending on many government programs, according to a U.S. official.

Core PCE prices rose 0.4% m/m and 4.7% y/y in April, both up a tenth from the previous month exceeding the Reuters consensus forecast by the same margin.

Consumer spending jumped 0.8% last month, accelerating from an upwardly revised 0.1% in March and zooming past the forecast of 0.4%.

U.Mich consumer sentiment rose unexpectedly while one-year inflation expectations fell three tenths to 4.2% and five-year expectations softened one tenth to 3.1%.

The non-farm payrolls report will be the top data release next week.

Movement in U.S. Treasury yields ranged from a rise of 7bp in two-years, flat in 10-years and a fall of 3bp in long bonds, with the U.S. fixed income market set for an early close ahead of the Memorial Day holiday.

This pushed the 2s-10s curve to a more sharply inverted -76.4bp from -71.6bp late on Thursday.

Hopes of a deal to extend the debt limit in time to avoid an unprecedented default boosted equities, with the S&P 500 surging 1.25% higher by 1 p.m.
in New York while the VIX eased below the 18 level.

Brent gained 0.58% and WTI rallied 0.92%.

Copper vaulted 2.56% higher and gold edged up 0.18%.

By afternoon trade, EUR/USD was 0.05% lower, USD/JPY held onto gains of 0.38%, GBP/USD edged 0.19% higher and AUD/USD firmed 0.13%.

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