EUR/USD stumbles to six-week low sponsored by advancement in US debt ceiling discussions

• Optimism around US debt ceiling talks and solid economic data push US T-bond yields higher.
• US housing market data shows improvement, with Building Permits and Housing Starts exceeding expectations.
• Eurozone inflation remains high, supporting further ECB tightening, while Fed officials maintain hawkish rhetoric.

EUR/USD continued to trend lower on Wednesday and reached a new six-week low of 1.0810 on optimism around the US debt ceiling talks amidst a tranche of positive economic data in the US. Hence, US T-bond yields jumped, underpinning the US Dollar (USD), a headwind for the Euro (EUR). At the time of writing, the EUR/USD is trading at 1.0838.

US T-bond Yields climb, while Eurozone inflation data supports ECB tightening

Wall Street continues its advance as sentiment improvement keeps traders leaning on riskier assets. US Treasury bond yields had risen, bolstering the US Dollar (USD) to new weekly highs. Negotiations between the White House and the US Congress about the debt ceiling seem to advance, as both sides commented that a default is not an option. The US House Speaker Kevin McCarthy commented that reaching an agreement this week is “doable.”

US data on Wednesday showed the housing market is improving. Building Permits for April dropped -1.5%, less than the expected -3% plunge, while Housing Starts for the same period smashed March’s -4.5% contraction and jumped by 2.2%. That, alongside Tuesday’s Retail Sales and Industrial Production printing positive numbers, paints a solid economic outlook in the United States.

Therefore, speculators trimmed the chances of seeing the US Federal Reserve (Fed) cutting rates three times a year to only two. The CME Fed Watch Tool shows odds of 40.8% for a 50 bps rate cut by the year’s end, higher than Tuesday’s reading.

US Federal Reserve officials crossed newswires. Loretta Mester, Thomas Barkin, and Raphael Bostic continued to push back against rate cuts, though the latter has moderated its stance. On the dovish front, Aaron Golsbee and Lorie Logan took a cautious stance but emphasized that no rate cuts are expected in 2023.

Across the pond, Eurozone (EU) inflation was aligned with estimates, though it remains at around 7% YoY in headline inflation. The core Harmonized Index of Consumer Prices (HICP) rose by 5.6%, aligned with estimates. Given that inflation remains three times the European Central Bank (ECB) objective, further tightening by the ECB is expected.

ECB officials continued to lean towards the hawkish side, but the ECB’s Vice President Luis de Guindos said that the ECB tightening is mostly done but still has a way to go.

EUR/USD Technical Levels