EUR/USD: U.S. political crisis worsens, threat of shutdown remains
October 4, 2023 11:23 am
The Euro-Dollar pair has established itself around the 4-figure range. At the moment, sellers are attempting to break through the support level at 1.0450, corresponding to the lower Bollinger Bands line on the D1 timeframe. EUR/USD bears are acting less aggressively than at the start of the trading week, but they still exhibit persistence, reflecting the overall strengthening of the greenback.
For the dollar, the “stars have aligned,” so to speak: the rise in risk-off sentiment coincided with hawkish expectations regarding the Federal Reserve’s future actions and, accordingly, with the increase in 10-year Treasury yields. Such a “full house” allowed dollar bulls to strengthen their positions across the market, including against the euro, which is forced to follow the quoted currency.
Recent events in the United States only fuel interest in the safe-haven dollar. We’re talking about the political battles on Capitol Hill, which have been ongoing for several weeks now. As of today, an obvious fact can be noted: Congress managed to avoid a government shutdown on October 1st (thanks to the passage of a temporary budget until November 17th), but it failed to avert a political crisis in the House of Representatives.
Note that the position of Speaker of the House of Representatives is considered the third most important in the United States (after the President and Vice President), as it holds significant power (determining legislative priorities, deciding which votes to bring to the floor, and overall shaping the legislative process). Therefore, his removal is a non-trivial event.
It’s worth mentioning that, for the first time in history, the House of Representatives forced its Speaker to resign. This happened yesterday, October 3rd, when Kevin McCarthy lost his position. It took 8 Republican votes, joined by all Democrats, to achieve this. As a result, there were 216 votes in favor and 210 against. The resignation was initiated by a representative of the so-called “Trumpists” (the far-right wing of the Republicans), Matt Gaetz, as he believed that Kevin McCarthy had cooperated with the White House to avoid a shutdown. Gaetz also accused him of having secret agreements with U.S. President Joe Biden regarding the advancement of certain bills.
After this historic vote, the inevitable question arises: what’s next? This question is relevant because it is currently unclear whether the temporary speaker (also a Republican) has all the powers of a permanent one or if he is endowed only with administrative authority. It is evident that for the undeniable legitimacy of the lower house of Congress, new elections need to be held. However, this is where the main problem lies.
Recall that McCarthy made history in Congress, becoming the Speaker of the House of Representatives at the beginning of the year through 15 votes. Now, as the U.S. presidential elections draw closer, choosing a compromise figure will be even more challenging. Republicans control the lower house of Congress, but the “Trumpists” (about 90 of them) take a more hardline position on many issues (from immigration to foreign policy), so they are ready to block any candidate willing to compromise with the Democrats. Whether the “moderate” Republicans can form a temporary alliance with the Democrats is an open question. But according to the majority of political analysts, it’s more likely to be a no than a yes.
Thus, the threat of a government shutdown remains. Moreover, yesterday’s events increased the probability of the most negative scenario coming to fruition. Amid such heated political battles, the safe-haven dollar has seen increased demand.
Other fundamental factors also provide significant support for the greenback, which has led to a rise in hawkish expectations regarding the Federal Reserve’s future actions. Several Federal Reserve representatives effectively announced another round of interest rate hikes this week (including Mester and Bowman). Macroeconomic statistics have also favored the dollar. For example, the ISM manufacturing index again demonstrated an upward trend (for the third consecutive month), rising to 49 points (against an expected decline to 47.2 points). Also, yesterday’s report shows that the number of job vacancies in the United States as of the last working day of August reached 9.6 million. This figure exceeded the forecasted level (8.8 million) and was higher than the July figure.
This information background has contributed to the rise in hawkish expectations. According to the CME FedWatch Tool, the probability of an interest rate hike by the Fed in November is now 30%, but in December, it’s over 40%. It’s worth noting that after the publication of the core PCE index (which reflected a decrease to 3.9% in August), the probability of a rate increase in November dropped below 20%. We can say that the Fed “hawks” have revived hopes of tightening monetary policy next month. This fact reflected in the 10-year Treasury yields (which have approached 4.9%) and the dynamics of the U.S. dollar.
However, despite the favorable fundamental background for the greenback, rushing to sell the EUR/USD pair may not be advisable. Bears have come close to the support level at 1.0450 (the lower Bollinger Bands line on the daily chart) but have failed to overcome this price barrier. In such conditions, short positions appear risky. Selling may be considered on corrective pullbacks to the range of 1.0500 – 1.0550 (the Tenkan-sen line on the D1 chart). In this case, the target for the downward movement will again be at 1.0450.
The material has been provided by InstaForex Company – www.instaforex.com
The Euro-Dollar pair has established itself around the 4-figure range. At the moment, sellers are attempting to break through the support level at 1.0450, corresponding to the lower Bollinger Bands line on the D1 timeframe. EUR/USD bears are acting less aggressively than at the start of the trading week, but they still exhibit persistence, reflecting the overall strengthening of the greenback.
For the dollar, the “stars have aligned,” so to speak: the rise in risk-off sentiment coincided with hawkish expectations regarding the Federal Reserve’s future actions and, accordingly, with the increase in 10-year Treasury yields. Such a “full house” allowed dollar bulls to strengthen their positions across the market, including against the euro, which is forced to follow the quoted currency.
Recent events in the United States only fuel interest in the safe-haven dollar. We’re talking about the political battles on Capitol Hill, which have been ongoing for several weeks now. As of today, an obvious fact can be noted: Congress managed to avoid a government shutdown on October 1st (thanks to the passage of a temporary budget until November 17th), but it failed to avert a political crisis in the House of Representatives.
Note that the position of Speaker of the House of Representatives is considered the third most important in the United States (after the President and Vice President), as it holds significant power (determining legislative priorities, deciding which votes to bring to the floor, and overall shaping the legislative process). Therefore, his removal is a non-trivial event.
It’s worth mentioning that, for the first time in history, the House of Representatives forced its Speaker to resign. This happened yesterday, October 3rd, when Kevin McCarthy lost his position. It took 8 Republican votes, joined by all Democrats, to achieve this. As a result, there were 216 votes in favor and 210 against. The resignation was initiated by a representative of the so-called “Trumpists” (the far-right wing of the Republicans), Matt Gaetz, as he believed that Kevin McCarthy had cooperated with the White House to avoid a shutdown. Gaetz also accused him of having secret agreements with U.S. President Joe Biden regarding the advancement of certain bills.
After this historic vote, the inevitable question arises: what’s next? This question is relevant because it is currently unclear whether the temporary speaker (also a Republican) has all the powers of a permanent one or if he is endowed only with administrative authority. It is evident that for the undeniable legitimacy of the lower house of Congress, new elections need to be held. However, this is where the main problem lies.
Recall that McCarthy made history in Congress, becoming the Speaker of the House of Representatives at the beginning of the year through 15 votes. Now, as the U.S. presidential elections draw closer, choosing a compromise figure will be even more challenging. Republicans control the lower house of Congress, but the “Trumpists” (about 90 of them) take a more hardline position on many issues (from immigration to foreign policy), so they are ready to block any candidate willing to compromise with the Democrats. Whether the “moderate” Republicans can form a temporary alliance with the Democrats is an open question. But according to the majority of political analysts, it’s more likely to be a no than a yes.
Thus, the threat of a government shutdown remains. Moreover, yesterday’s events increased the probability of the most negative scenario coming to fruition. Amid such heated political battles, the safe-haven dollar has seen increased demand.
Other fundamental factors also provide significant support for the greenback, which has led to a rise in hawkish expectations regarding the Federal Reserve’s future actions. Several Federal Reserve representatives effectively announced another round of interest rate hikes this week (including Mester and Bowman). Macroeconomic statistics have also favored the dollar. For example, the ISM manufacturing index again demonstrated an upward trend (for the third consecutive month), rising to 49 points (against an expected decline to 47.2 points). Also, yesterday’s report shows that the number of job vacancies in the United States as of the last working day of August reached 9.6 million. This figure exceeded the forecasted level (8.8 million) and was higher than the July figure.
This information background has contributed to the rise in hawkish expectations. According to the CME FedWatch Tool, the probability of an interest rate hike by the Fed in November is now 30%, but in December, it’s over 40%. It’s worth noting that after the publication of the core PCE index (which reflected a decrease to 3.9% in August), the probability of a rate increase in November dropped below 20%. We can say that the Fed “hawks” have revived hopes of tightening monetary policy next month. This fact reflected in the 10-year Treasury yields (which have approached 4.9%) and the dynamics of the U.S. dollar.
However, despite the favorable fundamental background for the greenback, rushing to sell the EUR/USD pair may not be advisable. Bears have come close to the support level at 1.0450 (the lower Bollinger Bands line on the daily chart) but have failed to overcome this price barrier. In such conditions, short positions appear risky. Selling may be considered on corrective pullbacks to the range of 1.0500 – 1.0550 (the Tenkan-sen line on the D1 chart). In this case, the target for the downward movement will again be at 1.0450.
The material has been provided by InstaForex Company – www.instaforex.com
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