EUR/USD rebound approaches 1.0900 as US default fears recede

• EUR/USD picks up bids to reverse the previous day’s pullback from weekly high.
• US policymakers’ optimism about debt ceiling extension favor sentiment and Euro buyers.
• Hawkish Fed bets, upbeat US data and unimpressive Eurozone statistics previously lured EUR/USD bears.
• Final readings of Eurozone inflation, US housing numbers may entertain Euro pair traders.

EUR/USD prints mild gains around 1.0870 as it pares the previous day’s losses amid very early Wednesday morning in Europe. In doing so, the Euro pair struggles to cheer the market’s cautious optimism about the US debt ceiling extension amid a light calendar and mixed clues.

That said, US President Joe Biden and House Speaker, as well as a top congressional Republican, Kevin McCarthy’s meeting renewed the market’s optimism that the US policymakers will be able to avoid the “catastrophic” default. Following the less-than one-hour-long meeting, congressional leaders, said, "It is possible to get a deal by the end of the week."

The optimism triggered a fall in the one-year US Credit Default Swap (CDS) spreads while also helping the S&P500 Futures to print mild gains and defy Wall Street’s downbeat performance. With this, the US Dollar Index (DXY) retreats to 102.57 following Tuesday’s upbeat performance as market sentiment improved on hopes of no US default.

It’s worth noting, however, that the recently hawkish Federal Reserve (Fed) talks and upbeat US data contrast with softer Eurozone statistics to prod the EUR/USD bulls.

Late Tuesday, Federal Reserve Bank of Chicago President Austan Goolsbee and Atlanta Fed President Raphael Bostic defended the US central bank’s hawkish moves by citing inflation woes as they spoke at a conference hosted by the Federal Reserve Bank of Atlanta. Previously, Richmond Fed Thomas Barkin said in an interview with the Financial Times (FT) that if inflation persists, or God forbid accelerates, there’s no barrier in my mind to further increases in rates. On the same line, Cleveland Fed President Loretta Mester said, “I don’t think we're at that hold rate yet.”

At home, the preliminary reading of the Eurozone’s first quarter (Q1) 2023 Gross Domestic Product (GDP) matches 0.1% QoQ and 1.3% market forecasts and priors. Further, the Eurozone ZEW Economic Sentiment Index dropped to -9.4 for May from 6.4 prior and the market estimates of 8.2 whereas Germany’s ZEW Economic Sentiment Index dropped to -10.7 from 4.1 in April, versus the market expectation of -5.5.

It should be noted that the European Central Bank (ECB) policymakers have been hawkish but seemed to have stopped suggesting the need for strong rate hikes of late, which in turn challenge the Euro pair buyers.

Looking ahead, final readings of the Eurozone inflation numbers for April, per the Harmonized Index of Consumer Prices (HICP) gauge, will precede the second-tier US housing data to direct intraday EUR/USD. Though, headlines surrounding the central banks and the US default will be more impactful and shouldn’t be missed for clear direction.

Technical analysis

Despite the latest recovery, EUR/USD justifies the previous day’s downside break of a weekly bullish channel, as well as the bearish MACD signals, amid a nearly oversold RSI (14) line. Apart from the RSI that suggests limited room for the Euro pair towards the south, multiple lows marked since April 10 around 1.0837-45 also challenge the bears. Meanwhile, the stated channel’s bottom line, near 1.0885 by the press time, guards the immediate rise of the Euro pair.