EUR/USD: Inflation Worries, Debt Ceiling Standoff Impact Euro-Dollar Exchange Rate

EUR/USD Highlights

• US bond yields and inflation expectations drive Dollar’s rise.
• Debt ceiling standoff and Fed’s hawkish stance influence market.
• Safe-Haven Buying of Dollar Boosts Strength Against Euro

EUR/USD Overview

According to analysts, there are several factors contributing to the Euro’s weakness and the recent strength of the US Dollar. Some of these factors include concerns about inflation in the United States, worries about the debt ceiling standoff, and global economic growth, which has led to safe-haven buying of the Dollar. The recent increase in US bond yields has also supported the Dollar’s position.

At 11:35 GMT, the EUR/USD is trading 1.0879, up 0.0025 or +0.23%. On Friday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $100.18, down $0.60 or -0.59%.

US Yields Surge, Inflation Concerns

The rise in US yields over the past couple of days was driven by the University of Michigan’s survey, which showed that consumers’ long-term inflation expectations reached their highest level since 2011. This development has raised the possibility of a Federal Reserve interest rate hike next month, and traders are currently placing the odds of such a hike at 11.5%.

Fed’s Hawkish Stance Fuels Yield Rise

One of the reasons behind the increase in US yields is the stronger-than-expected Michigan inflation expectations. Additionally, Federal Reserve officials have consistently adopted a hawkish stance by emphasizing that they have no intention of reducing interest rates.

Traders initially expected significant interest rate cuts by the Fed by the end of the year. This expectation was due to a slowdown in US economic growth. However, it is now believed that substantial rate cuts are unlikely. This shift in expectation could lead to a potential weakening of the Euro and a rise in the Dollar as traders adjust their expectations.

Investors Seek Safe-Haven Dollar

Some analysts suggest that investors are buying the safe-haven Dollar due to concerns about the debt ceiling standoff. This increased demand for the Dollar is occurring ahead of an important meeting between President Joe Biden and congressional leaders scheduled for Tuesday.

Technical Analysis

The EUR/USD rebounded from earlier weakness 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.