EUR/USD Recovery Hinges on Debt Ceiling Deal

EUR/USD Prices, Charts and Analysis:

Popularly read: Debt Ceiling Blues, Part 79. What if the US defaults?

It has not been the most fruitful week as the euro fluctuates between lower and higher against the pound and continues to fall against the dollar. However, EUR/USD remains the pair to watch, falling for the fourth week in a row against the US dollar.

Policymakers at the European Central Bank (ECB) have maintained their hawkish rhetoric for much of this week, but failed to provide much support for the euro. This may be due to the fact that the market already sees the ECB as the most hawkish central bank going forward. Markets already appear to be pricing in the hawkishness of the recent outpouring of ECB policymakers as big changes are needed for the bulls to return.

Meanwhile, the US dollar continues to rise as a deal on the US debt ceiling remains to be reached heading into the new week. However, U.S. Treasury Secretary Janet Yellen adjusted the schedule, saying that the United States could default on its debt as early as June 5 without raising the debt ceiling from June 1. The Treasury is set to make more than $130 billion in scheduled payments in the first two days of June. Includes payments to veterans, Social Security and Medicare beneficiaries. The new date will give more time for negotiations, but the longer this commotion lasts, the more volatility could be in the market.

Friday’s US PCE data was better than expected, further supporting the US dollar after a hawkish reassessment of the Federal Reserve’s (FED) rate hike probability in June. The market is now pricing in a 71% chance that the Fed will raise rates by 25bps in June, up from 17% a week ago.

Source: CME FedWatch Tool

Euro CPI, NFP, US debt ceiling

Heading into the new week, we have some Eurozone data with some particularly important CPI flash numbers. But even with the surprise CPI announcement, I don’t expect much change in the outlook for the euro.

Over the next week, the US dollar dynamics around the debt ceiling will once again take the lead. This will tie in with Friday’s NFP jobs report, which will no doubt be important following the strong PCE data. But if a debt ceiling deal is reached, the dollar could continue its long-term downtrend after peaking in September 2022.

economic calendar for the next week

The next week on the calendar will continue to be busy with a few “high” rated data releases and a number of “moderate” rated data releases scheduled.

Below are some of the major ‘ratings’ risky events for the coming week on the economic calendar.

For all market-moving economic releases and events, DailyFX Calendar

technical outlook

In the EUR/USD weekly chart above, we can see that the price has been pushed down to an important support level. The 1.0700 level is where the previous breakout occurred in early March, before the EUR/USD hit year-to-date highs.

EUR/USD Weekly chart – May 26, 2023

Source: TradingView

Moving down to the daily timeframe, we can see that the indecision around the 1.0700 mark has already begun. Friday’s daily candlestick ended with a Doge candle signaling a possible recovery heading into the new week. Of course, Monday is a public holiday, so liquidity and volatility are expected to be low, barring some surprises in the debt ceiling deal.

A breakout of the critical 1.0700 level may retest the 1.0600 mark before the focus shifts to the psychological 1.0500 mark. Further up from here will have a difficult task of breaking out of resistance and the 100-day moving average near 1.0800. EURUSD has been trading above the MA since November 2022, so the 100-day moving average could prove to be stubborn. Breaking the 1.0800 handle draws attention to 1.0900, potentially reaching the psychological 1.1000 level. There is no doubt that the coming week will be interesting, especially for the EUR and EURUSD.

EUR/USD Daily chart – May 26, 2023

Source: TradingView

Written by: Zain Vawda, Market Writer DailyFX.com

Contact and follow Zain on Twitter: @zvawda