EUR/USD faces barricades above 1.0880 as spotlight shifts to US debt-ceiling issues

• EUR/USD is struggling in extending its recovery above 1.0880 as the USD Index has made a recovery.
• The expectations for a neutral policy stance by the Federal Reserve have jumped further as US labor market conditions have started easing.
• The street is mixed over the interest rate guidance for the European Central Bank as the central bank seems far from the interest rate peak.
• EUR/USD is making efforts for shifting the auction above the 38.2% Fibonacci retracement at 1.0876.

EUR/USD is facing delicate barricades around 1.0880 in the early European session. The major currency pair is struggling in extending its recovery further as the US Dollar Index (DXY) is gathering strength for a reversal after a sheer correction.

S&P500 futures witnessed selling pressure in early Asia as investors are paring positions in risk-sensitive assets ahead of the US debt-ceiling talks. The overall market mood is turning risk-averse as investors are worried that further delay in US debt-ceiling outcome would fuel fears of a default in augmenting obligated payments by the US Treasury.

The US Dollar Index (DXY) has shown signs of recovery after building a base around 102.40. Apart from the US debt-ceiling talks, the United States Retail Sales data also holds significant importance. Meanwhile, the demand for US government bonds has increased. The 10-year US Treasury yields have dropped below 3.49%.

Federal Reserve policymakers’ mixed views on interest rate guidance

An unchanged interest rate policy by the Federal Reserve (Fed) is widely anticipated by the market participants as the United States inflation is consistently softening for the past few months. Also, US Producer Price Index (PPI) has slowed down sharply due to a bleak economic outlook and lower gasoline prices. Recently, the expectations for a neutral policy stance jumped further as US labor market conditions started easing. However, Federal Reserve policymakers have mixed views on interest rate guidance.

Atlanta Federal Reserve President Raphael Bostic. Fed policymaker told Bloomberg on Monday that, if he were voting now, he would vote to hold rates in June. However, he warned that he has to keep a possible rate hike on the table.

While Richmond Federal Reserve Bank President Thomas Barkin believes “It is not obvious to me that there is a financial stability challenge of having a higher rate path.  I don’t see the urgency of making a different decision because of financial stability risks.”

Investors await US debt-ceiling talks

Investors are underpinning the risk-aversion theme to dodge uncertainty associated with US borrowing cap negotiations to avoid the risk of default by the US Treasury in augmenting obligated payments. Postponed Friday’s meeting is scheduled for Tuesday and a volatile action in the FX domain cannot be ruled out. No doubt, US President Joe Biden will work on closing the argument with approval for a higher borrowing cap for the US Treasury without surrendering the budget for spending initiatives. However, House of Representatives Joseph McCarthy would also attempt for reducing spending to avoid expanding budget deficit.

Reuters reported that US House Speaker Kevin McCarthy told on Monday, “Congressional and White House negotiators were still far apart in talks to raise the debt ceiling to avoid a default.”

Eurozone GDP to remain in spotlight

The street is awaiting the release of the preliminary Eurozone Gross Domestic Product (GDP) data to understand its economic strength as European Central Bank (ECB) policymakers have been consistently betting on the Eurozone’s economic resilience for a period of time. As per the estimates, the pace of GDP growth is seen unchanged on a quarterly and an annual basis at 0.1% and 1.3% respectively.

Meanwhile, the street is confused over the interest rate guidance for the European Central Bank (ECB) as the central banks seem far from the interest rate peak.

EUR/USD technical outlook

EUR/USD is making efforts for shifting auction above the 38.2% Fibonacci retracement (placed from March 15 low at 1.0516 to April 26 high at 1.1095) at 1.0876 on a four-hour scale. The downward-sloping trendline from May 08 high at 1.1054 will act as a barricade for the Euro bulls.

Also, the 20-period Exponential Moving Average (EMA) at 1.0893 is restricting the upside for the shared currency bulls.

The Relative Strength Index (RSI) (14) would drop again if fails to jump above 40.00.