EUR/USD Recovery Hinges on Debt Ceiling Deal

EUR/USD PRICE, CHARTS AND ANALYSIS:

Most Read: Debt Ceiling Blues, Part 79. What Happens if the US Defaults?

The Euro did not enjoy its most productive week as losses against the greenback continued while fluctuating between losses and gains against the Pound. EUR/USD however remained the pair of interest, putting in a fourth week of losses against the US Dollar in succession.

The European Central Bank (ECB) policymakers have maintained a hawkish rhetoric for much of the week yet failing to offer the Euro any significant support. This may lie in the fact that markets are already viewing the ECB as the most hawkish Central Bank moving forward. Markets appear to have already priced in the hawkishness spouted by ECB policymakers of late with a significant change required for bulls to return.

The rally in the US dollar meanwhile continues as a deal on the US debt ceiling remains elusive as we head toward the new week. US Treasury Secretary Yellen did however adjust the date she believes the US could default as early as June 5 without a debt ceiling hike, previous date was June 1. The Treasury will make more than $130 bln of scheduled payments in first two days of June, including payments to veterans, social security and Medicare recipients. The new date does buy negotiators more time yet the longer this rumbles on the more volatility we may see in Markets.

Fridays US PCE data came in better than expected resulting in further support for the US dollar as we saw a hawkish repricing of Federal Reserve (FED) Rate hike probabilities for June. Markets are now pricing in a 71% chance of a 25bps hike from the Fed in June, up from 17% a week ago.

Source: CME FedWatch Tool

EURO CPI, NFP AND US DEBT CEILING

Heading into the new week, and we do have some Euro Area data with the flash CPI release of particular importance. However, even with a surprise from the CPI release I do not expect any material change to the Euros outlook.

The week ahead promises to be dominated once more by the US dollar narrative around the debt ceiling. This will be coupled with Fridays NFP jobs report with which will no doubt be of significance following the strong PCE data. A deal on the debt ceiling however could see the dollar continue on its longer-term downtrend since peaking in September 2022.

ECONOMIC CALENDAR FOR THE WEEK AHEAD

The week ahead on the calendar remains busy with a couple of ‘high’ rated data releases, and a host of ‘medium’ rated data releases expected.

Here are some of the key high ‘rated’ risk events for the week ahead on the economic calendar:

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

TECHNICAL OUTLOOK

The weekly chart for EUR/USD above and we can see that price has pushed down to a key support level. The 1.0700 level is where the previous breakout occurred in early March before EUR/USD rallied to its YTD High.

EUR/USD Weekly Chart – May 26, 2023

Source: TradingView

Dropping down to a daily timeframe and we can see that indecision around the 1.0700 mark has already begun. Friday’s daily candle closing as a doji candlestick hinting at the potential for recovery heading into the new week. Monday is of course a bank holiday with liquidity and volatility expected to be low barring any surprises on a debt ceiling deal.

A break of the key 1.0700 level could open up retest of the 1.0600 mark before focus shifts toward the psychological 1.0500 mark. A push higher from here has the tough task of breaking back above resistance and the 100-day MA at around 1.0800. The 100-day MA could prove stubborn as EURUSD had been stuck above the MA since November 2022.A break of the 1.0800 handle brings 1.0900 into focus and potentially the psychological 1.1000 level. No doubt an interesting week ahead for the Euro and EURUSD in particular.

EUR/USD Daily Chart – May 26, 2023

Source: TradingView

Written by: Zain Vawda, Market Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda