EUR/USD Slides on Debt Ceiling Concerns, Fed Uncertainty

Highlights

• Euro declines due to U.S. debt ceiling discussions and Fed uncertainty.
• Investors worried about potential default as debt limit deadline approaches.
• Fed expected to pause interest rate hikes, inflation concerns remain.

Overview

The Euro is edging lower against the U.S. Dollar towards the end of the trading session on Wednesday. The decline is due to ongoing discussions between the White House and Republican representatives about raising the debt ceiling without reaching an agreement. Moreover, the Euro remained in a weakened state after the release of the minutes from the Federal Reserve’s meeting in May, which indicated that there was less certainty about the need for further interest rate increases.

As of 18:30 GMT, the EUR/USD is trading at 1.0751, experiencing a decrease of 0.0023 or 0.21%. The Invesco CurrencyShares Euro Trust ETF (FXE) is valued at $99.28, down $0.17 or 0.17%.

Debt Limit Deadlock Raises Concerns

The lack of progress in raising the U.S. government’s debt limit, which currently stands at $31.4 trillion, before the June 1 deadline has made investors more anxious due to the increased risk of a potentially catastrophic default. Negotiators representing President Joe Biden and top congressional Republican Kevin McCarthy met for further discussions on Wednesday, but no breakthrough has been achieved yet.

Investors had been optimistic about a resolution on the U.S. debt ceiling issue until yesterday. However, as we approach the June 1st deadline, known as the X-date, cautiousness has returned.

Yellen Warns of Impending Default

U.S. Treasury Secretary Janet Yellen stated on Wednesday that a default on the debt ceiling could occur in early June, and she intends to provide an update to Congress regarding the government’s financial situation in the near future. Some private forecasters, such as Goldman Sachs and Moody’s Analytics, have estimated that a default may occur a few days after June 1, potentially between June 6 and June 9.

During a Wall Street Journal forum, Yellen mentioned that it is difficult to determine the exact day when the U.S. government will run out of funds, but she aims to provide a more precise date based on incoming government receipts.

Investors Watch Fed’s Monetary Policy

Investors are also closely monitoring the Federal Reserve’s monetary policy. They anticipate that the central bank will pause its aggressive interest rate hikes at its meeting on June 13-14. Fed Governor Christopher Waller expressed concerns about the lack of progress in inflation and indicated that while postponing an interest rate hike next month is a possibility, an end to the tightening campaign is unlikely.

Technical Analysis

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

If sellers continue to emerge and there is an acceleration to the downside then look for the move to possibly extend into 1.0657 (S2).

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.

For a look at all of today’s economic events, check out our economic calendar.