The situation around the US debt ceiling is heating up. But things are different now, unlike in 2011 when the dollar lost to the franc and the yen ahead of the deadline. Why? Let’s discuss this topic and make up a trading plan for EURUSD.
Weekly US dollar fundamental forecast
Concerns about a global recession and an increase in the possibility of a federal funds rate hike in July. These two factors, not the safe-haven asset status, strengthen the US dollar. The unexpected collapse of the Eurozone PMI and the rise in UK core inflation has heightened fears about a global economic recession. Perhaps the Bank of England will be forced to raise the interest rate to 5.5%, reducing GDP. When things get rough outside the US, the greenback becomes popular, and the EURUSD falls.
It cannot be said that the situation in the USA is perfect. The debt ceiling issue is unnerving markets as the deadline approaches. Fitch believes that the omission of payments on June 1 will be inconsistent with the highest US credit rating of AAA. The agency changed its outlook to negative. JP Morgan predicts a 25% chance that the agreement will not be concluded before the deadline. The possibility is growing every day.
However, House Speaker Kevin McCarthy argues that markets need not worry as there is still time for Congress to make a deal. Democrats are ready to freeze discretionary spending in 2024 and increase budget spending by only 1% in 2025. Things are moving. If only the Republicans would start retreating from their demands!
The Fed’s officials’ hawkish rhetoric continues to pressure EURUSD. Christopher Waller said it is unclear what central bank officials will do in June. But whatever they do, they will have to raise rates even more in 2023. The futures market is abandoning the idea of a dovish reversal, as the chances of lower borrowing costs in November have fallen to 40%. However, there is a 66% chance of a monetary expansion in December. At the same time, the risks of monetary tightening in July are growing. Derivatives predict a 56% chance.
I still disagree that the greenback is strengthening because of its safe-haven status. Due to default fears, investors demand higher Treasury bills and bond yields. Rates on debt maturing in early June (most exposed to default) soared above 7%. The US dollar hitting a 20-year high in 2022 continues to follow treasury yields now.
2011 case suggests that the USD did not appreciate as fast as the Japanese yen or Swiss franc before the deadline. Now the situation is different.
Weekly EURUSD trading plan
Thus, bets on the market abandoning the Fed’s dovish reversal idea in 2023 and the associated increase in US Treasury yields turned out to be successful. EURUSD selling strategies starting from 1.104-1.1055 continue to yield profits. 1.0715 and 1.0665 serve as the nearest targets.
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