EUR/USD Strengthens as Investors Shift Focus to US Borrowing Limit Issue

EUR/USD Highlights

• Euro gains strength as Dollar faces downward pressure
• Concerns over U.S. default weigh down the greenback
• Shift in focus to borrowing limit issue supports the EUR/USD

EUR/USD Overview

On Tuesday, the Euro gained strength against the U.S. Dollar as the latter continued to face downward pressure. The greenback was weighed down by concerns over the possibility of a U.S. default, resulting from an ongoing impasse between Democrats and Republicans regarding the debt ceiling. The deadlock showed little indication of being resolved, further contributing to the Dollar’s weakness. Additionally, the Euro received a boost from declining U.S. Treasury yields, diminishing the attractiveness of the Dollar as an investment.

At 11:53 GMT, the EUR/USD is trading 1.0886, up $0.0012 or +0.11%. On Monday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $100.41, up $0.24 or +0.24%.

Euro’s Decline Reversed Amid Borrowing Limit Concerns

Last week, the Euro declined significantly against the U.S. Dollar as the Dollar gained demand as a safe-haven currency amid concerns over the slow Chinese Covid recovery. Additionally, unexpected growth in U.S. consumer inflation expectations fueled speculation about a potential June interest rate hike by the Federal Reserve, further strengthening the position of the Dollar.

However, this week, investors have shifted their focus to the impending borrowing limit issue, which has become a major concern. This shift is supporting the EUR/USD on Tuesday. Treasury Secretary Janet Yellen reiterated the possibility of reaching the borrowing limit as early as June 1. This caused unease in the market. President Joe Biden expressed confidence in resolving the issue before his expected meeting with congressional leaders later on Tuesday. On the other hand, Republican House of Representatives Speaker Kevin McCarthy indicated that significant differences still exist between the two sides, suggesting a lack of progress in negotiations.

Concerns about Elevated Rates and Potential Recession Persist

Furthermore, on Tuesday, U.S. Treasury yields decreased as investors analyzed comments from Federal Reserve officials to gain insights into future interest rate decisions. In addition, they evaluated economic data to assess the probability of a contraction in the U.S. economy.

Several Fed Presidents, including John Williams, Lorie Logan, Loretta Mester, and Raphael Bostic, were anticipated to deliver remarks. Bostic expressed skepticism about a rapid decline in inflation and suggested that rate cuts are unlikely to be announced this year, even in the event of a potential recession. Minneapolis Fed President Neel Kashkari also emphasized the importance of caution in the fight against inflation.

Chicago Fed President Austan Goolsbee advised taking a careful approach to policy decisions. He noted that the economy has yet to realize the full impact of the previously announced rate hikes. Last week’s inflation data, which slightly missed expectations, fostered hopes among investors for rate cuts in the second half of the year. Concerns about elevated rates pushing the U.S. economy into a recession have become more prominent in recent weeks.

Technical Analysis

The EUR/USD rebounded from weakness on Monday as it approached 1.0834 (S1). If this move is able to generate enough upside momentum then look for a near-term surge into the PIVOT at 1.0965.

A failure to hold 1.0834 (S1) will indicate the selling pressure is getting stronger. This could put the single currency in a position to accelerate to the downside with 1.0657 (S2) the next potential target level.