EurUsd Weekly Outlook for May 29, 2023 – With bated breath

• As we anticipate the decision from the American Congress concerning the debt ceiling, issues of interest rates and inflation have been relegated to the background. Despite the default risk being relatively low, anxiety is mounting in the market following Janet Yellen’s assertion that cash reserves are nearing depletion.
• Persistent indicators of economic deceleration in the Eurozone have started to exert pressure on the European Central Bank (ECB), which is concurrently grappling with the implications of a strengthening dollar that is propelling inflationary trends.
• The EurUsd currency pair is currently pushing against the 1.07 support levels, presenting critical price points for the persistence of the bull market. A downtrend breakthrough at this stage would hold substantial ramifications across all financial markets.

At the PhotoFinish

Much like a closely contested race, EurUsd is also confronting a heightened level of uncertainty due to the impending decision on raising the debt ceiling, a situation which will remain critical up to the final moments. Janet Yellen, on behalf of the government administration, has already announced that cash reserves are set to run out in the early days of June, leading to a halt on wage payments and potential default on the debt. While the markets have not fully factored in this scenario, some short-term indicators, such as Credit Default Swaps (CDS) on American debt, are showing significant signs of stress.

Furthermore, American interest rates, already high due to Federal Reserve’s monetary policy, are climbing further as the market demands a higher risk premium in light of potential default. This elevated compensation rate has led to an increase in real interest rates and the relative attractiveness of the US dollar, often to the detriment of other assets like gold and yen.

This environment is worsened by a more severe economic slowdown in Europe than initially anticipated, which could prompt the European Central Bank (ECB) to anticipate new increases in the cost of capital. In the Eurozone, the composite Purchasing Managers Index (PMI) data has fallen below expectations (at 53.3 compared to the forecasted 54.1), with a particularly noticeable weakness in the manufacturing sector (44.6 versus a projected 46.2), suggesting an end to the previous expansion phase in the economy.

For the Euro, it’s the Moment of Truth

The initial surge that commenced in 2022 encountered significant resistance, as anticipated, around the 1.10 mark. An initial attempt was made at the beginning of the year, followed by a second a few weeks ago, which was characterized by price-oscillator divergences and a markedly negative sentiment towards the dollar that suggested a need for the greenback’s repricing. Now, the EurUsd faces substantial technical levels. The 150-day moving average, even more so than the 200-day one, has been reliably guiding the fluctuations in the exchange rate. The latest test occurred in March 2023. At the 1.07 level, we stand at a crucial juncture for the European single currency. If we see a push towards a retest of the 1.10 area (more likely 1.12) from this point, it would probably also alleviate concerns in financial markets about the debt ceiling issue. However, if there’s a downward breach of the 1.07 level instead, the situation would become considerably more intricate, and it could signal the end of this brief positive period for EurUsd.

One chart that particularly unsettles traders with substantial long positions in EurUsd (a majority among futures market speculators) is the one that illustrates the abrupt and unanticipated expansion of the spread between US and German government bonds. This expanding differential, potentially a temporary phenomenon due to the uncertainties surrounding the federal debt ceiling issue, graphically presents a signal that doesn’t bode well for EurUsd. The inverse correlation between these two variables is clear, and a confirmation of an upward breakout in the spread would serve as a positive indicator for the US dollar.