The recently-concluded deal on the debt ceiling adds new headwinds to the US economy already burdened by the highest interest rates in decades.
The preliminary agreement, developed by President Joe Biden and House Speaker Kevin McCarthy over the weekend - provided that it is approved by Congress in the coming days - avoids the worst-case scenario of a default triggering a financial collapse. However, it also increases the risks of a downturn in the world's largest economy.
As a recession threatens to occur in Q1 2024, maintaining spending at the same level will inevitably slow down the economy, assuming that the Federal Reserve persists with interest rate hikes. After all, recent data has indicated growth in US income and spending in April of this year, as well as another surge in the PCE index.
This means that spending limits, together with high inflation and high interest rates, challenge the Federal Reserve. The new spending plan must be taken into account as it will affect economic growth forecasts and interest rates. Last week's forecast indicates a probability of an unchanged policy at the meeting on June 14. Tight fiscal policy, along with a similar credit policy, will undoubtedly have a negative impact on GDP growth rates.
Federal spending in the early quarters of this year helped support economic growth in the face of headwinds, including a decline in housing construction. Just two weeks before the debt limit agreement, economists estimated a 65% chance of a recession in the upcoming year. However, considering that spending limits will be implemented starting October 1, policymakers still have time to try to mitigate the consequences that previous spending, high interest rates, and the lack of economic stimulus programs may lead to.
In terms of the forex market, euro is still bearish, but seeing growth is not impossible. For this, the quote has to remain above 1.0710, or reach 1.0750. This will allow a rise beyond 1.0790, heading towards 1.0840. In case of a decline around 1.0710, euro will fall to 1.0670 and 1.0630.
Pressure on pound also remains, so to see growth, the quote has to consolidate above 1.2390. Only that will trigger a much larger rise to 1.2430 and 1.2470. In case there is a decline, bears will attempt to take 1.2345, which could lead to a fall to 1.2300 and 1.2260.