EUR/USD: Easing on Fed Rate Expectations, Debt Default Progress

EUR/USD Highlights

• Euro drops, U.S. dollar reaches seven-week high
• Progress in debt negotiations boosts confidence in the dollar
• U.S. Treasury yield increase supports the dollar against the Euro

EUR/USD Overview

On Thursday, the Euro dropped by about 0.3% to $1.0805, its lowest level in six weeks, while the U.S. dollar reached its highest point in seven weeks. The decline in the Euro and the strengthening of the dollar were influenced by multiple factors.

Firstly, President Biden and Kevin McCarthy made progress in avoiding a damaging debt default, boosting confidence in the dollar. Secondly, investors adjusted their expectations concerning the Federal Reserve’s easing measures. Additionally, the increase in U.S. Treasury yields, driven by the progressing negotiations on the debt ceiling deal, further supported the U.S. dollar against the Euro.

As of 11:42 GMT, the EUR/USD currency pair was trading at 1.0817, down 0.0022 or -0.20%. Similarly, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $100.07, down $0.20 or -0.20% on Wednesday.

Biden, McCarthy Boost Risk Sentiment

Anxiety surrounding the possibility of a U.S. debt default eased to some extent following positive statements from President Biden and Kevin McCarthy, expressing confidence in reaching a deal before the June 1 deadline. Defaulting on debt obligations, as cautioned by Treasury Secretary Janet Yellen, could have severe consequences such as significant declines in GDP, job losses, and turmoil in global bond and stock markets.

Debt Ceiling Deal Progress Boosts Dollar

President Biden and McCarthy’s commitment to promptly raise the government’s debt ceiling, currently at $31.4 trillion, after resolving a long-standing deadlock through direct negotiations, has instilled some positive impact on the dollar. In the short term, the debt ceiling situation can affect the dollar positively, regardless of the outcome. A worsened situation may lead to a global economic downturn, driving investors towards the safe-haven status of the dollar. Conversely, a resolution could change expectations about the Federal Reserve’s actions, potentially resulting in an interest rate hike.

Market Shifts Expectations on Rates

Traders are currently estimating a 20% probability of the Federal Reserve increasing its interest rate in June, whereas a month ago, a similar probability was assigned for a rate cut. Looking ahead, for the December meeting, traders have priced in an interest rate of 4.525%, implying an expectation of around 55 basis points of easing by the year’s end, slightly lower compared to the previous day.

Market Awaits Fed’s Economic Insights

Investors are also monitoring economic data and statements from Federal Reserve officials for insights into the U.S. economy and central bank policy. Mixed views from Fed speakers have been shared, with some advocating for more measures to lower inflation, while others believe the full impact of higher rates is yet to be felt. Additional remarks from Fed officials are expected, along with weekly initial jobless claims data and April’s existing home sales figures.

Technical Analysis

The EUR/USD is trading on the weakside of 1.0834 (S1) on Thursday, putting it in a bearish position. If the selling pressure continues to increase and there is an acceleration to the downside then 1.0657 (S2) will appear on the radar as the next major target.

Overcoming and sustaining a rally over 1.0834 (S1) will signal the return of buyers. This could generate the upside momentum needed to retest the PIVOT at 1.0965.