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EUR/USD. The southern marathon is in full swing, but sales remain risky
May 31, 2023 1:26 pmVideo
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The euro/dollar pair continues to plummet. Corrective northward retracements accompany the downward trend, but the overall outcome favors the bears in the EUR/USD pair. Looking at the weekly chart, we can see that the pair has been within a southern trend for the fourth consecutive week: if in early May the price was hovering around the middle of the 10th figure, today traders have tested the support level at 1.0660 (the lower boundary of the Bollinger Bands indicator on the H4 timeframe). In less than a month, the pair has declined by 400 points, reflecting the strength of the downward trend.
Political battles on Capitol Hill
The “southern marathon” is driven by strengthening the greenback, which has gained support amid growing risk-averse sentiment. The dollar has been rising for the fourth consecutive week, and the negotiations on raising the US debt ceiling have been ongoing for about the same time. All other fundamental factors (many of which are not in favor of the US currency) have taken a back seat.
Today’s southern impulse in the EUR/USD pair is also due to a surge in risk-averse market sentiment. Traders are growing concerned about the compromise bill’s fate aimed at avoiding a default in the United States. On the one hand, things are going well: just yesterday, the bill passed another stage in Congress (the relevant committee approved further consideration of the document). On the other hand, some members of Congress are already stating that they will vote against the compromise bill. In particular, this was announced by a member of the House of Representatives, Nancy Mace, representing the Republican Party.
Furthermore, yesterday’s preliminary agreement in the House Rules Committee passed with difficulty: the committee supported the bill by a slim margin of 7 “in favor” and 6 “against.” Representatives from the far-right wing of the Republicans, committee members Chip Roy and Ralph Norman, have stated that they will vote against the deal if it is not modified.
Although the bill passed through the key committee (whose members decide which bills can be brought to a vote in the House of Representatives), the fact of the narrow margin did not sit well with market participants. Risk-averse sentiment has increased again, and the safe-haven greenback has regained its position against the basket of major currencies.
Moreover, today, May 31, the high-profile bill may be brought up for discussion and voting in the House of Representatives. In anticipation of such a significant event, all other fundamental factors have taken a back seat (for dollar pairs). The focus is on the political battles on Capitol Hill.
What’s next?
The House of Representatives consists of 435 members. A minimum of 218 votes is required to approve a bill. According to insider information from the American press (in particular, CNN), members of the Republican Party will give at least 150 votes. As for the Democrats, again, according to the media, a “sufficient number” of Democratic Party representatives will vote in favor of the bill for it to be passed. In particular, members of the “New Democrats” faction openly supported the deal. A significant majority of the 98 members of the faction are expected to support the bill.
After the bill is approved (if approved) in the lower house of Congress, it will be passed for consideration in the Senate. Preliminary estimates suggest the document could be passed by the end of the week. At least the Democratic Majority Leader in the upper house of Congress, Chuck Schumer, and Republican Leader Mitch McConnell recently stated that they are “working to have the bill passed by June 5,” the deadline announced by the US Treasury Department. It should be noted that Janet Yellen had previously warned that the resources of her department would be exhausted by this date if Congress does not raise the debt ceiling or suspend its operation.
In other words, the fate of the high-profile bill, which has attracted the attention of many market participants, will be decided in the coming days. In my opinion, the decisive round will take place today – if the bill is brought to a vote in the House of Representatives (which, I remind you, is controlled by Republicans).
The safe-haven dollar received additional support today from Chinese data as well. The published PMI index for the manufacturing sector in China was in the “red zone,” reaching 48.8 points (with a forecast decline to 49.5). The indicator has declined for the third consecutive month and is below the key 50-point mark since April. The non-manufacturing activity index in China also entered the “red zone,” declining for the second consecutive month.
Concerns about global growth have allowed the dollar to come back amid the rise of risk-averse sentiment in the markets.
Nevertheless, despite the attractiveness of short positions in the EUR/USD pair, entering into sales is still risky. If the House of Representatives votes for the compromise bill today or tomorrow, buyers of the pair may launch a powerful counterattack, potentially pushing it back towards the 1.08 level. Therefore, it is advisable to maintain a wait-and-see position in the pair soon.
The material has been provided by InstaForex Company – www.instaforex.com
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