The euro-dollar pair once again came under pressure today. After a modest corrective rise to the level of 1.0830, EUR/USD buyers lost their initiative once again, and the pair returned to the 7th figure area. However, sellers cannot boast of any significant achievements either. The pair is drifting in a narrow price range on the border between the 7th and 8th figures, reflecting the indecisiveness of both the bears and the bulls in EUR/USD.
The focus of traders' attention remains on the question of raising the U.S. debt ceiling. The information saga surrounding this topic resembles a long-running Brazilian soap opera. The plot of the series is not distinguished by originality and diversity: a sluggish negotiation process is underway, which, according to the genre's law, should end with a happy ending. However, the catch is that it is already May 23rd, while the default in the U.S. could occur as early as June 1st.
Negotiation saga
Negotiations between Republicans and Democrats regarding the increase in the U.S. national debt ceiling have been going on for three weeks now. Last week, U.S. President Joe Biden joined the process and met with Republican House Speaker Kevin McCarthy last Tuesday. The meeting ended without results: the parties "agreed to continue negotiating." Recall that over the weekend, Biden alarmed the markets by saying that he could not guarantee the success of the negotiations since the outcome depends not only on Democrats but also on Republicans. At the same time, he announced another round of negotiations, which concluded yesterday. And again—without results.
Despite the "inability to reach an agreement," both sides declare that default is excluded as an option. Judging by the reaction of the currency market, traders have no doubt that politicians will eventually find common ground on this issue. But at the same time, they glance at the clock, noting the approaching deadline. Such a contradictory situation forces market participants to exercise caution, both in the context of long positions and short positions. It is possible that a deal will be reached in a few days or even a few hours before June 1st. Just like 12 years ago, in 2011, Republicans and Democrats reached an agreement three days before the deadline.
The issue of raising the debt ceiling has long turned into a subject of political bargaining as the opposition seeks to achieve its own goals. Therefore, in this case as well, politicians are playing on each other's nerves—and apparently, they will continue to do so until the last moment.
Returning to yesterday's meeting between Biden and McCarthy, it should be noted that both sides noted some progress but also stated that an agreement on the debt ceiling has not yet been reached. In particular, the Republican reported that the tone of the discussion compared to previous meetings has "noticeably improved," but "nothing has been agreed yet, everything is still being discussed."
Traders are not panicking but being cautious
It is necessary to note that last week, traders reacted extremely negatively to the failure of negotiations between Biden and McCarthy: the safe-haven dollar significantly strengthened its position across the market. This week, the market responded much more calmly to the news that the debt ceiling deal did not materialize. This indicates that market participants, for the most part, are confident in a successful outcome of the negotiations. However, it can be assumed that until the negotiation saga concludes, EUR/USD traders will exercise caution, and the pair will drift between the 7th and 8th figures.
All other fundamental factors continue to play a secondary role. For example, the PMI indices released today, clearly did not favor the euro. In particular, the German manufacturing PMI plunged to 42.9 points in May, marking the weakest result since April 2020. The Eurozone manufacturing PMI also entered the "red zone," reaching a minimum since May 2020. Despite such a dismal result, the pair demonstrated a phlegmatic reaction to the release, continuing to maneuver on the border between the 7th and 8th figures.
Conclusions
Another round of negotiations between Republicans and Democrats regarding the debt ceiling increase ended in failure. However, the market reacted relatively calmly to this fact: the U.S. dollar index showed modest growth, reflecting a decrease in panic sentiment in the markets. The EUR/USD pair, in turn, entered a drift, trading within a narrow price range of 1.0780–1.0830.
Despite the absence of panic and the underlying confidence in a "happy ending," traders, it seems, will maintain caution regarding trading decisions until the negotiation saga concludes. In such volatile fundamental conditions, buying and selling appear risky, as the fate of the pair in the medium term depends on the fate of the political deal, which hypothetically can be concluded at any moment.