U.S. government debt situation supports the dollar

12 May 2023 162
U.S. government debt situation supports the dollar

The EURUSD currency pair at the beginning of May broke its uptrend, which had existed since the middle of March. The factor of reaching the debt ceiling in the U.S. began to influence the strengthening of the dollar.

 

Treasury Secretary Janet Yellen has said that the only good solution for the current U.S. debt problem is to raise the ceiling by Congress. President Joe Biden and House Speaker Kevin McCarthy postponed a meeting on the debt ceiling scheduled for Friday. Yellen added that it is not clear yet when the Treasury Department will run out of money. She told Congress that the Treasury Department could run out of funds by June 1.

 

The solution of the U.S. national debt issue is being postponed closer to the date of a potential default in early summer. There is a growing tension, but in the end the national debt will be raised. The dollar began to show strength amid the worsening situation. Probably, this process will intensify in the coming weeks, and the dollar will continue to strengthen. Accordingly, the EURUSD currency pair will decrease.

Moreover, when the U.S. government debt is raised, the Treasury Department will start borrowing in the debt market immediately. As a result, U.S. government bond yields will begin to rise, which is an additional support for the growth of the dollar in world markets.

 

On the other hand, we can pay attention to the dyssynchronization of monetary banks in the U.S. and the EU. The U.S. has announced a pause in rate hikes, while the EU intends to tighten its policy more. This factor is a support for the euro. However, now all investors' attention is focused on the government debt ceiling, and the rate differential plays less of a role in pricing the asset.

 

According to the technical analysis, the EURUSD currency pair is forming a downtrend. It is also worth to note the downward exit from the rectangle, which was relevant in the last month. Now the currency pair has new downside targets at the level of the previous price resistance of 1.075. Stop-loss can be set when the euro returns to the flat range and goes above the bearish Maribozo candlestick of May 11. Stop corresponds to the price of 1.101.

 

The EURUSD currency pair decline:

Take profit – 1.075

Stop-loss – 1.101

This content is for informational purposes only and is not intended to be investing advice.

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