EUR/USD Gains Momentum as Debt Ceiling Talks, Powell’s Comments Impact Dollar

EUR/USD Highlights

• Euro strengthens against the US dollar
• US debt ceiling talks and Powell’s remarks affect the dollar
• Euro’s recovery continues after hitting a seven-week low

EUR/USD Overview

The Euro gained strength against the US dollar on Monday due to unexpected issues arising from US debt ceiling negotiations and remarks made by Federal Reserve Chair Jerome Powell, who suggested a slower pace of interest rate hikes. This positive momentum followed the euro’s recovery on Friday after hitting a seven-week low.

At 14:02 GMT, the EUR/USD is trading 1.0809, up 0.0001 or +0.01%. On Friday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $99.87, up $0.06 or +0.06%.

Crucial Debt Ceiling Meeting Looms

Market participants are eagerly awaiting a crucial meeting between US President Joe Biden and House Republican Speaker Kevin McCarthy on Monday to discuss the debt ceiling. Talks between the two parties abruptly broke down on Friday when Republican negotiators walked out. Biden called for the Republicans to move away from their extreme position, while McCarthy emphasized the need for Biden to distance himself from the socialist wing of the Democratic Party and represent America.

A compromise will be necessary from both sides to reach an agreement. The dollar faced downward pressure as talks resumed but no reported progress was made, reflecting the expected brinkmanship as the Treasury is likely to run out of money in early June, known as the “X-date.” Despite this, there remains hope for a potential deal.

Dollar Outlook Shifts Amid Fed’s Pause Preference

The focus for the dollar is likely to shift towards the Federal Reserve’s outlook, with Powell’s preference for a pause in interest rate hikes outweighing any hawkish comments from regional Fed presidents. This sentiment is expected to drive the dollar lower, making it advantageous to sell on rallies and supporting the euro.

Powell highlighted at a central bank conference on Friday that tighter credit conditions may mean that the policy rate does not need to increase as much as previously anticipated to achieve their goals. He reiterated that decisions will be made on a meeting-by-meeting basis. While acknowledging that inflation remains elevated, recent turbulence in the banking sector suggests that interest rates may not need to rise as much as initially expected to control it.

Debt Ceiling Worries Dent Treasury Yields

Concerns over the debt ceiling negotiations led to a decline in US Treasury yields on Monday, as market participants evaluated the future direction of Federal Reserve interest rate policy amidst mixed messages from officials, prompting traders in the money market to significantly reduce their bets on a rate hike occurring on June 14, with the probability now at just 9%.

Debt Ceiling Worries Dent Treasury Yields

European Central Bank President Christine Lagarde highlighted the importance of preparing for sustainably high interest rates as a means to achieve the bank’s inflation target.

EUR/USD traders can expect further insights from central bank speakers scheduled to address the market on Monday, ahead of the release of the Federal Reserve’s meeting minutes on Wednesday.

Powell’s indications of a preference for a pause in interest rate hikes, along with the potential for a deal to be reached on the US debt ceiling, tilt the outlook for EUR/USD towards a bullish sentiment, as the euro is expected to benefit from the weaker dollar, supported by expectations of a more cautious approach from the Federal Reserve.

Technical Analysis

The EUR/USD is trading on the weakside of 1.0834 (S1) on Monday, putting it in a bearish position. This is the new resistance.

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 over the near-term.

If seller re-emerge and there is an acceleration to the downside then 1.0657 (S2) will appear on the radar as the next major target.