Greenback is caught in a zone of uncertainty. Throughout almost the entire previous week, it strengthened despite many fundamental factors working against the American currency. However, on Friday, dollar bulls finally gave up their positions amid the soft comments from Federal Reserve Chairman Jerome Powell.
At the start of the new trading week, the situation remained in limbo: neither buyers nor sellers of EUR/USD were willing to open large positions, so the pair traded in a narrow price range near the 8-figure mark. The possible default in the U.S. continues to worry investors, leading to rapidly changing news sentiment: optimism alternating with pessimism and concern, and vice versa.
Meanwhile, the greenback is oscillating back and forth: on the last trading day, bears set a six-week low (1.0760) but failed to push it down to the base of the 7-figure mark. Moreover, on the same day, they lost momentum, allowing the pair to finish the week at 1.0804.
Considering the current situation, the inevitable question arises: which way will the pendulum swing, in favor of the American currency or the opposite? To answer this question, let's understand the reasons behind such "meaningless" volatility.
Emotional swings
If we compare the daily chart of EUR/USD with the news flow regarding the fate of the U.S. debt ceiling, it becomes apparent that traders' "emotional swings" were driven by just one topic. For example, the recent failed negotiations between Republicans and Democrats, which took place last Tuesday, caused a stir around the dollar. Although the politicians used fairly diplomatic wording, both sides admitted that a deal was still far from being reached.
Yesterday, U.S. President Joe Biden became the main newsmaker on this issue. Previously radiating optimism, he suddenly changed the tone of his rhetoric, stating that he could not guarantee a "happy ending" because the decision is not solely in the hands of his fellow party members in Congress but also the Republicans, for whom he cannot vouch. Such a statement could have provoked strong volatility in dollar pairs (in favor of the greenback) if Biden had not later eased the situation with additional comments. He announced that he had a phone conversation with Kevin McCarthy, the Republican Speaker of the House of Representatives. Without going into details, the President mentioned that the conversation went "constructively and well," adding that they would speak again on Monday.
Judging by the behavior of the American currency, the market is optimistically viewing the upcoming negotiations, which could be the final ones before reaching the necessary compromise. It is noteworthy that both Republicans and Democrats, along with Biden, unanimously state that a U.S. default would have "very serious" consequences, making it an unacceptable scenario. The U.S. President is ready to make a deal (meaning Democrats are willing to make some concessions regarding budget cuts), but at the same time, he is not willing to make a deal "solely on Republican terms."
Uncertain Prospects
What does the current situation imply? That trading continues. According to the information from the American TV channel NBC News, President Joe Biden and House Speaker Kevin McCarthy will meet in person at the White House today "to resume negotiations on a possible increase in the debt ceiling."
Based on the events of the previous week, it can be assumed that in the event of another failure, the dollar will once again gain momentum.
Interestingly, traders today essentially ignored yet another "panic-inducing" statement from U.S. Treasury Secretary Janet Yellen. In a special TV address, Yellen once again warned that there is very little time left until the default date. According to her, June 1st is a "hard deadline" for raising the federal debt limit. She also added that the likelihood of the government collecting enough revenue to last until June 15th (when additional tax receipts are expected) is "quite low."
The significance of Yellen's statement should not be underestimated. It is a sort of "delayed-action release": if today's planned negotiations end without results once again, the aforementioned "reminder of the deadline" (with only a few days remaining) will increase volatility among dollar pairs. And the EUR/USD pair will not be an exception here.
Conclusions
Traders of dollar pairs are frozen in anticipation of the next negotiations on raising the U.S. debt ceiling. Judging by the behavior of the greenback, market participants maintain a certain level of optimism regarding their potential outcomes.
However, despite the corrective price pullback, long positions on the EUR/USD pair are still too risky. If Republicans and Democrats continue to "play on each other's nerves," bargaining for more favorable deal conditions while approaching the deadline, the safe-haven dollar will make its presence felt once again. In that case, the EUR/USD pair will not only return to the 7-figure range but may also attempt to break below the support level at 1.0680 (the Kijun-sen line on the W1 timeframe).