The euro-dollar pair, on the wave of another donward impulse yesterday, dropped to the 1.0760 mark, which corresponds to the lower border of the Kumo cloud on the daily chart. After reaching this target, most traders locked in their profits, thus extinguishing the downward dynamic—at the moment, an upward correction is being observed. It is quite likely that this is just a correction: given the developing information background, the EUR/USD bears might again try to build on their success, at least in the context of a decline to the base of the 7th figure.
The next level of support is located at the 1.0650 mark (Kijun-sen line on the W1 timeframe), breaking through which will open the way to the main price barrier at 1.0510. At this price point, the lower Bollinger Bands indicator line on the weekly chart coincides with the upper border of the Kumo cloud. On the one hand, there are more than 200 points left to the conditional "final point." On the other hand, the pair fell almost 250 points in just a week: if last Thursday the pair was traded near the borders of the 10th figure, then yesterday it updated its multi-week low at the 1.0760 mark. Therefore, the prospects for reaching the 5th figure are quite real, especially if the Republicans and Democrats can't agree on raising the U.S. debt ceiling soon. And given the incoming insights, the probability of such a scenario is quite high.
Topic No. 1
First of all, it should be noted that the threat of default is topic No. 1 for traders of dollar pairs. Almost all other fundamental factors have taken a back seat, with the exception, perhaps, of the possibility of the Fed raising interest rates at the June meeting. However, this fundamental factor is also on the side of the greenback against the background of hawkish statements from Fed representatives. And yet, the main attention of market participants is riveted to the political battles that are unfolding in Washington around the issue of raising the U.S. public debt ceiling.
Usually, this is a routine procedure, but only when Democrats (or Republicans) control both houses of Congress and their representative heads the White House. Such a political alignment was, for example, before the last midterm elections. But now the Republican Party controls the House of Representatives, and the Democrats—the Senate. Therefore, the routine procedure has turned into a political confrontation with unpredictable consequences.
Overall, in the public sphere, both sides seem optimistic. On Tuesday, following another round of negotiations, U.S. President Joe Biden and House Speaker Kevin McCarthy confirmed their intention to reach a deal to increase the maximum amount of federal debt (to $31.4 trillion). However, such a response did not reassure investors, as de facto politicians simply "agreed to negotiate." Biden went to the G7 summit but cancelled his visit to Australia to return to the negotiation process with Republicans this Sunday (May 21). The very fact of cancelling a state visit to another country (such events are planned for months) alarmed market participants, as it emphasized the seriousness of the situation. There is not much time left until the "X hour": on June 1, the country's government may declare a default on its debt if Congress is unable to raise the debt ceiling.
An insider published by Reuters yesterday also added fuel to the fire. According to journalists, there is a "small but influential faction" in the camp of Republican congressmen, whose representatives warned that they could try to block any agreement on raising the debt ceiling "if it does not contain significant cuts in federal spending."
Against such signals, the safe-haven greenback has once again strengthened its position across the market: the U.S. dollar index updated its two-month high, reaching the 103.50 mark. The main dollar pairs of the "major group" reacted accordingly, reflecting the strengthening of the American currency.
Federal Reserve: an ally of the Greenback
Additional support for the dollar was provided by some Fed representatives, who allowed for the possibility of raising interest rates at one of the upcoming meetings (such an assumption was made, in particular, by Lorie Logan and James Bullard).
The hawkish statements came against the backdrop of a decline in key inflation indicators in April and therefore served as serious support for dollar bulls. Based on this, we can conclude that the EUR/USD pair was diving down this week not only due to the intensification of risk-off sentiments, but also due to the growth of hawkish expectations regarding the Fed's further actions.
According to the CME FedWatch Tool, the likelihood of a 25-point rate hike at the conclusion of the June meeting is now almost 40%. For comparison, it should be noted that at the beginning of May, the chances of a 25-point scenario were estimated at only 5%–8%.
Conclusions
The situation for the EUR/USD pair is contradictory. On the one hand, everything speaks in favor of opening short positions. The threat of default in the U.S. is growing, and the Fed representatives are tightening their rhetoric.
On the other hand, entering sales now is very risky: if American politicians still find a compromise solution on Saturday–Sunday and announce a consolidated position, the dollar may significantly and sharply fall across the market. And it is important to remember that the key negotiations (involving Biden) will take place on Sunday—hence, there is a chance that on Monday, trading will open with an upward gap in the EUR/USD pair.
Therefore, under the current conditions, it is advisable to maintain a wait-and-see position and at least stay out of the market until Monday.