Forecast: EUR/USD Recovery Depends on Debt ceiling deal

EUR/USD PRICE, CHARTS AND ANALYSIS:

The euro did not have its most productive week as losses continued against the dollar while it fluctuated between losses and gains against the pound. However, the EUR/USD pair remained the most interesting, posting losses against the US dollar for the fourth week in a row.

European Central Bank (ECB) policymakers maintained their aggressive rhetoric for much of the week, but without providing significant support to the euro. This could be because markets already view the ECB as the most monetary policy-oriented central bank. The markets seem to have already priced in the recent comments by ECB policymakers, so a significant change is needed for the bulls to return.

Meanwhile, the US dollar’s rally continues as an agreement on the US debt ceiling is still not in sight at the start of the new week. However, US Treasury Secretary Yellen changed the date on which she believes the US could default as early as 5 June without a debt ceiling hike; the previous date was 1 June. The Treasury will make scheduled payments of more than $130 billion in the first two days of June, including payments to veterans, Social Security and Medicare recipients. The new deadline buys negotiators more time, but the longer the negotiations go on, the more volatility can be expected in the markets.

Friday’s US consumer data came in better than expected, further supporting the US dollar as the probability of a Federal Reserve (Fed) rate hike in June was revised upwards. Markets now expect a 71% probability of a 25-basis point rate hike by the Fed in June, up from 17% a week ago.

Source: CME FedWatch Tool

EURO CPI, NFP AND US DEBT CEILING

At the start of the new week, there is some data due from the Eurozone, with the CPI release being of particular importance. However, even if the CPI release surprises, I do not expect any significant change in the outlook for the euro.

The week ahead will once again be dominated by the debate on the US dollar debt ceiling. Added to this is Friday’s NFP labor market report, which will undoubtedly be important after the strong PCE data. However, an agreement on the debt ceiling could lead to the dollar continuing its longer-term downward trend, which peaked in September 2022.

ECONOMIC CALENDAR FOR THE WEEK AHEAD

There are a number of “high” rated data releases and a number of “medium” rated data releases on the calendar for the coming week.

Here are some of the key “highly rated” risk events for the coming week on the economic calendar:

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TECHNICAL PROSPECTS

The weekly chart above for EUR/USD shows that the price has fallen to an important support level. The 1.0700 level is where the previous breakout occurred in early March before EUR/USD rose to its high for the year.

EUR/USD Weekly Chart – May 26, 2023

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Source: TradingView

Going down to the daily time frame, we can see that indecision around the 1.0700 level has already started. Friday’s daily candlestick closed as a doji candlestick, indicating the potential for a rally early in the new week. Monday is of course a bank holiday, where liquidity and volatility are expected to be low, barring any surprises in the debt ceiling deal.

A break of the key 1.0700 level could lead to a retest of 1.0600 before the focus shifts to the psychological 1.0500 level. A rise from here has the difficult task of breaking back above resistance and the 100-day MA at around 1.0800. The 100-day MA could prove stubborn as EURUSD has been stuck above it since November 2022. A break of the 1.0800 level brings the 1.0900 level into focus and possibly the psychological 1.1000 level. Undoubtedly, an interesting week lies ahead for the euro and EURUSD in particular.

EUR/USD Daily Chart – May 26, 2023

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Source: TradingView

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