President Joe Biden and Republican House Speaker Kevin McCarthy are set to meet on Monday to continue the negotiations aimed at preventing a catastrophic US default.
In recent days, conflicting reports have emerged, saying that there is significant progress in the discussions, followed by impasses. But what is evident is that both parties are still fighting for political advantage and hoping for a better deal for themselves. In fact, officials spent over two hours on Sunday evening at McCarthy's office in the US Capitol, but the details of the meeting were not disclosed.
This is why many traders are preparing for further volatility. Last Friday, despite relatively dovish statements from Fed Chairman Jerome Powell, the stock market declined after Republicans temporarily halted negotiations.
Biden called McCarthy on Sunday, which the latter described as productive, shifting the outlook from previous pessimism to optimism. But on the same day, Treasury Secretary Janet Yellen stated that the chances of the US being able to pay all its bills by mid-June were quite low. Yellen emphasized the urgency of the situation, mentioning significant payments expected by that time and the need to resolve all issues by June 1. She had previously warned that the US could run out of money to fulfill all its debt obligations. Economists at Goldman Sachs also estimated that the remaining cash balance of the US Treasury in June would be lower than necessary to meet debt payments.
Spending cuts and restrictions are key points of disagreement in the negotiations. Before leaving Japan, Biden told journalists that he had proposed spending reductions and that it was now up to the Republicans to reconsider their demands. The President insisted that he would not agree to a deal that protected tax breaks for the wealthy and for fossil fuel and pharmaceutical companies while simultaneously cutting funding for healthcare and education.
In any case, markets and investor optimism will depend on the outcome of the negotiations. Progress would allow risk assets to rise, strengthening the positions of both euro and pound.
In terms of the forex market, euro is still bearish, but seeing growth is not impossible. For this, the quote has to remain above 1.0790, or reach 1.0835. This will allow a rise beyond 1.0870, heading towards 1.0905. In case of a decline around 1.0790, euro will fall to 1.0760 and 1.0720.
Pressure on pound also remains, so to see growth, the quote has to consolidate above 1.2470. Only that will trigger a much larger rise to 1.2510 and 1.2540. In case there is a decline, bears will attempt to take 1.2420, which could lead to a fall to 1.2390 and 1.2350.