EUR/USD: Inching Higher Amid U.S. Debt Deal Concerns, Lower Treasury Yields

Highlights

• Euro rises against the U.S. Dollar after U.S. government avoids default.
• Concerns arise about potential obstacles to the deal’s approval in Congress.
• U.S. Dollar weakens as yields decrease and uncertainty lingers.

Overview

On Tuesday, the Euro is inching up against the U.S. Dollar, having previously reached its lowest level since March 20 during the session.  The initial cause of the Euro’s rise was likely the relief that the U.S. government successfully avoided a potential default. However, this positive sentiment was overshadowed by concerns about potential obstacles in Congress for the deal’s approval.

At 12:00 GMT, the EUR/USD is trading 1.0743, up 0.0032 or +0.30%. Last Friday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $99.10, up $0.11 or +0.11%.

Traders Cheer Borrowing Limit Suspension

Traders reacted positively to the agreement to suspend Washington’s borrowing limit until January 2025, resulting in a rally in longer-dated U.S. Treasuries. The agreement included spending caps and cuts in government programs, which led to a decrease in yields.

The decline in yields is causing the U.S. Dollar to weaken due to uncertainty surrounding the deal’s approval in Congress. Some hard-right Republican lawmakers expressed opposition to the bill on Monday, but it is still expected to pass.

Debt Ceiling Agreement Reached, Vote Expected Soon

President Joe Biden and House Speaker Kevin McCarthy reached an agreement to raise the debt ceiling over the weekend. Treasury Secretary Janet Yellen stated that the U.S. would default on its debt obligations as early as June 5, a few days later than the previous June 1 deadline.

A vote on the deal is anticipated to take place Wednesday in the Republican-controlled House of Representatives and later in the week in the Democrat-controlled Senate. Some Republicans have voiced their disagreement with the deal, indicating that there are still obstacles to its approval.

Despite the challenges, politicians from both sides are expressing confidence in finding a resolution, and analysts hold optimism about approving the deal before the deadline.

Investors Concerned Over Debt Deal’s Consequences

Although there was initial optimism about the deal, investors now have concerns about potential negative consequences resulting from the compromise. Analysts predict approximately $600 billion worth of bill issuance in the next six to eight weeks.

Market Evaluates Treasury’s Impact, Inflation Concerns

The market is currently evaluating the implications of the Treasury’s issuance size and its impact on the economy. While the announcement of a future debt deal boosts market sentiment, it also puts pressure on growth due to spending cuts and tighter liquidity conditions. However, this aligns with the Federal Reserve’s efforts to cool down the economy, which could have a dampening effect on inflation.

Investors analyzed the April personal consumption expenditures price index, which exceeded expectations with a monthly increase of 0.4%. This index is considered the Federal Reserve’s favored measure of inflation.

At the same time, there is increasing uncertainty surrounding the Federal Reserve’s interest rate policy and the possibility of further rate hikes in their ongoing fight against persistent inflation.

Throughout the week, market participants anticipate a series of jobs data that could offer new insights into the state of the U.S. economy and potentially impact monetary policy decisions.

Technical Analysis

The EUR/USD is trading higher on Tuesday as buyers stepped in as the Forex pair neared support. If this move generates enough upside momentum, we could see a retest of 1.0834 (S1). If sellers continue to dominate the trade then look for the break to extend into 1.0657 (S2).

For a look at all of today’s economic events, check out our economic calendar.