Dollar Weakens on Debt Ceiling Talks and Powell’s Comments

EUR/USD at Support. Will the Bulls Step In?

The dollar started to slide against the yen and euro on Friday and the weakness continued Monday. The decline was triggered by unexpected complications in the U.S. debt ceiling negotiations and by comments made by Fed Chair Jerome Powell, who suggested a slower pace of interest rate hikes.

A key meeting will take place today, between U.S. President Joe Biden and House Republican Speaker Kevin McCarthy. The goal of this meeting is to discuss the ongoing issue of the debt ceiling.

On Friday, negotiations between the two sides hit a stumbling block when Republican negotiators abruptly walked out of the meeting. Although talks eventually resumed, there was no reported progress from either side, which negatively affected the value of the dollar.

During a central bank conference in Washington on Friday, Powell said “our policy rate may not need to rise as much as it would have otherwise to achieve our goals”. However, he indicated that decisions would be made on a “meeting by meeting” basis.

Following the debt ceiling debacle, the probability of a rate hike in June now stands at just 9%, according to data from CME’s FedWatch tool.

Key Data for the Week Ahead

Monday at 1:45 pm GMT we take a look at the U.S. Manufacturing and Services PMIs, two reports that show the opinions of purchasing managers regarding overall business conditions in the said sectors.

Wednesday at 6:00 pm GMT we take a look at the FOMC Meeting Minutes, which is a detailed record of the latest FOMC Meeting. It provides insights into the reasons that determined the rate vote and possibly, clues about the next rate move.

The final release of the week, and probably the most important, will be the Core PCE Price Index which is scheduled for release on Friday at 12:30 pm GMT. This is one of the main gauges of inflation in the United States and usually has a very strong impact on the US Dollar.

Technical Outlook – EUR/USD

The pair is currently trading at 1.0815 after bouncing at 1.0775 support. In last week’s post, we talked about a potential touch of 1.0775, especially if the bears can close a Daily candle below the 50-day Moving Average. Now that this target was reached, it’s likely to see a more significant bounce up.

The Bollinger Bands are moving in the same direction (last week they were moving in opposite directions, showing momentum), so we may see a move up from the lower band. Furthermore, the RSI has curved upwards and all these factors together may trigger a move into the 50 MA. However, it’s worth noting that the US Dollar will be affected by the debt ceiling talks and the rest of the data that’s due for release.