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EUR/USD Analysis
The US Senate approved the debt ceiling bill overnight , a day after it had cleared the House of Representatives. US President Biden spoke of a «big win for our economy and the American people», adding «I look forward» to sign the bill into law.
The bipartisan resolution came after fraught negotiations and just days ahead of a potential US default that could spark global unrest, as the government could become unable to pay all of its obligations by June 5.
This comes as two Fed voters pushed back against a rate hike in the upcoming meeting, with both Mr Jefferson and Mr Harker arguing in favor of staying in the sidelines this time, but kept door open to more tightening. This caused a dovish shift in market expectations and Mr Harker doubled down yesterday, saying that it’s time to «hit the stop button» this month and «see how it goes» . CME’s FedWatch Tool assigns the highest probabilities to rates staying at 5.25% this month and falling to 5.00% by the end of the year, but still prices in one more hike in between.
The improved sentiment from the successful resolution of the debt-ceiling saga and the dovish repricing in expectations around the Fed’s policy path, is an unfavorable combination for the USDOLLAR. However, today US Jobs report looms.
The outcome will likely affect the Fed’s next move, market expectations of it and the trajectory of EUR/USD. The labor market has been very tight, with elevated wages and unemployment at five-decade lows. Weak results could cement a pause, but strong data can put a June hike back in play, while the positive news around the debt ceiling enable the central back to pursue a more aggressive stance.
Its European counterpart is clearly more aggressive and we got another round of hawkish speakers this week, including President Lagarde, who noted yesterday that «need to continue our hiking cycle» , while the accounts of the last decision ECB revealed «a number» of members preferring a bigger hike, than the one delivered (0.25%) . However, the preliminary figures, showed a noteworthy deceleration in both headline and core CPI inflation.
EUR/USD comes from a losing month, but jumped yesterday due to the aforementioned factors, defending the critical 200Days EMA, which had contained the February-march correction. This gives the common currency the chance to reclaim the EMA200 (1.0840), but strong catalyst will be required for rebound above the daily Ichimokou Cloud (1.0980).
On the other hand, last month’s drop has created scope for further losses towards the 2023 lows (1.0481), although i remain cautious for sustained weakness in that region. In any case, the next leg off the move, will likely be determined by today’s NFPs.
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