EUR/USD Finds Reprieve at Key Support, Amidst Tentative Debt Ceiling Deal & Hot PCE Inflation

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EUR/USD Analysis

Friday's report showed that the Fed's preferred inflation measure, the core PCE, rose to 4.6% y/y in April. More to it, headline PCE accelerated 4.4% y/y (from 4.2% prior), halting the declining streak since the June 2022 multi-decade high.

Markets have already been moderating their expectations for an end to the current tightening cycle and multiple rate cuts ahead, with Friday's hot PCE inflation report adding to the hawkish repricing. CME's Fed Watch Tool now assigns the highest probabilities to one more hike in June - to 5.50% - and to rates standing at 5.25% at the end of the year. [1]

US leaders reached an agreement in regards to the debt ceiling over the weekend, in a deal that "takes the threat of catastrophic default off the table", according to President Biden [2]. The agreement still needs to be approved by both chambers of Congress and this is not a foregone conclusion.

On Friday meanwhile, Treasury Secretary Yellen estimated that June 5 is the date until which the government "will have insufficient resources to satisfy the government's obligations" [3]. This gives time to Congressmen to vote on the deal, as the Ms Yellen had previously expected funds to run out as early as June 1.

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EUR/USD registered another losing week, since the hot inflation report strengthened the hawkish repricing around the Fed's policy path, which has benefited the greenback. The pair is exposed to the key 200Days EMA (1.0680-90) and this brings the 2023 lows in the spotlight (1.0515-1.0481). We are still cautious for sustained weakness at this region, as the ECB is still on track to deliver more rate hikes than its US counterpart.

The pair had a muted reaction to the US debt ceiling deal, which requires Congress approval though. Successful outcome can help the greenback as it enables the Fed to pursue further tightening, but broader sentiment improvement could help the common currency.

EUR/USD finds support today ahead of the critical DMA200, which had contained the February correction. As long as t defends it, the broader uptrend is intact and the pair can rebound into the daily Ichimokou Cloud and challenged the EMA200 (1.0860-70). It does not yet inspire confidence for daily closes above it, while the 2023 highs are distant.

Wall Street and UK markets will remain closed today which suggest a slow start to the week, but things heat up later on, with the US Jobs report standing out on Friday.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 28 May 2023 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

2

Retrieved 28 May 2023 https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/05/28/remarks-by-president-biden-on-the-bipartisan-budget-agreement/

3

Retrieved 17 Jun 2024 https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-Members-20230526-McCarthy.pdf

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