Due to the confusion surrounding the U.S. debt ceiling, investors are trying to listen to central bank speakers. And it should be noted that it's working. Speeches by Jerome Powell and Neel Kashkari from the Federal Reserve, as well as Christine Lagarde from the ECB, have allowed EUR/USD to find solid ground. The main currency pair managed to hold above 1.08 and is preparing for the release of European business activity data.
Jerome Powell has spoken extensively about the delayed effects of monetary tightening. This is usually interpreted by the markets as a signal of a pause in the process of raising the federal funds rate. His colleague from the Minneapolis Federal Reserve, Neel Kashkari, was more candid. He stated that a pause under the current conditions is the optimal choice. The Federal Reserve has not yet tamed inflation. The central bank has the opportunity to sit on the sidelines and observe how the situation in the U.S. economy unfolds.
Such rhetoric led to the first decline in Treasury bond yields in a week and forced the bears on EUR/USD to retreat. The pair is sensitive to the dynamics of interest rates in the U.S. debt market. And if volatility on that market increases, as predicted by BlackRock and PIMCO, the dollar will also be stormy.
Dynamics of volatility of the U.S. debt market
Christine Lagarde's speech provided support for the euro. The Frenchwoman noted that the ECB has not only not finished the cycle of monetary policy tightening, it also has no intention of taking a pause. It's a clear contrast between Frankfurt and Washington. The Federal Reserve is currently choosing between a pause and the completion of its cycle.
However, Credit Agricole believes that the ECB is being deceptive. In the near future, it will ramp up its quantitative tightening program. And this is bad for EUR/USD. Firstly, the combination of rate cuts and quantitative tightening will lower market expectations regarding the ceiling of borrowing costs. Secondly, the program will reduce liquidity, which is not good for the eurozone stock market. The market is currently thriving, but a lack of money will result in a correction, weaken capital inflows, and limit the euro's growth potential. Lastly, lending conditions in the eurozone will become stricter. This will revive the topic of a recession, which had been almost forgotten.
Dynamics of the dollar and U.S. bond yields
In reality, the rally of EUR/USD from November to April was fueled by the belief that the worst had been avoided. After the start of the armed conflict in Ukraine, economists painted a doomsday scenario for the German economy. They talked about a 12% contraction in GDP amid soaring gas prices and millions of unemployed. And those who discussed it with moderate optimism were met with criticism.
In fact, things turned out differently. The cost of natural gas in Europe plummeted to a two-year low, and the currency bloc's economy managed to avoid a recession. However, that alone is not enough for EUR/USD to fully restore its upward trend.
Technically, a breakthrough of pivot levels at 1.083 and 1.0835 will increase the risks of further growth of the pair towards resistance levels at 1.087 and 1.089. It is advisable to sell EUR/USD at those levels.
