EUR/USD: Plummets as U.S. Dollar Surges on Weak Consumer Sentiment

Euro Highlights

• Euro declines as U.S. Dollar strengthens on weak consumer sentiment
• Investor concerns over debt ceiling contribute to Euro’s decline
• Demand for safe-haven US Dollar Weighs on Euro

Euro Overview

On Friday, the Euro experienced a sharp decline as the U.S. Dollar surged. The reason behind this was a report indicating a six-month low in U.S. consumer sentiment for May, which further bolstered negative investor sentiment regarding discussions around raising the U.S. government’s debt ceiling. As a result, the U.S. Dollar gained strength, leading to a substantial loss in value for the Euro throughout the week.

The EUR/USD settled at 1.0850, down 0.0066 or -0.60%. The Invesco CurrencyShares Euro Trust ETF (FXE) finished at $100.18, down $0.60 or -0.59%.

Safe-haven Shift: Dollar Gains

Concerns about the government’s borrowing cap and Federal Reserve monetary policy prompted a shift to safe havens like the greenback. Lack of confidence in the economy is translating to a retreat to the safer dollar. Meanwhile, weaker-than-expected wholesale prices data issued Thursday, a sign of easing inflation, failed to shield investors from ongoing concerns of a downturn.

US Consumer Sentiment Hits Six-Month Low

U.S. consumer sentiment slumped to a six-month low in May on worries that political haggling over raising the borrowing cap could trigger a recession, the University of Michigan survey showed. A preliminary reading on the University of Michigan’s consumer sentiment index fell to a six-month low. Economists polled by the Dow Jones expected a May reading lower than the actual figure. The survey also showed a rise in the outlook for inflation over the next 5 years, tying the highest level since June 2008.

US Debt Ceiling Risks Spark Concerns

The Congressional Budget Office warned that the United States faced a “significant risk” of defaulting on payment obligations within the first two weeks of June without raising the government’s debt ceiling. This added uncertainty to payment operations throughout May. Investors closely monitored debt ceiling negotiations, as a meeting between President Joe Biden and congressional leaders was postponed to next week.

Inflation Trends Impact Fed’s Rates

Fed Governor Michelle Bowman stated that the U.S. central bank might need to raise interest rates further if inflation remains high. However, recent indicators such as the consumer price index (CPI) and producer prices have shown a slowdown in inflation. It is possible that U.S. inflation continues to decelerate while the value of the dollar declines, while European inflation remains high. In this scenario, the Fed may not need to cut rates until the end of the year when they assess inflation against their own projection.

Technical Analysis

The EUR/USD pulled further away from the pivot at 1.0965, putting it in a position to challenge 1.0834 (S1). We could see a technical bounce on the first test of this level, but if it is taken out with strong selling pressure, the downmove could possibly extend into 1.0657 (S2).