Despite the optimistic news that Biden and Republicans have agreed to raise the U.S. debt ceiling, the EUR/USD pair started the trading week fairly calmly. The price is fluctuating within a narrow price range, near the base of the 7th figure.
The threat of default is still not eliminated
The phlegmatic behavior of traders can be explained not only by the fact that most trading platforms are closed on Monday (the Catholic world celebrates Trinity Sunday, and in the U.S., Memorial Day) but also by another equally important circumstance. The fact is that America's top politicians have only reached an agreement in principle, while the compromise bill (which, in essence, does not fully satisfy either Republicans or Democrats) still needs to be pushed through both houses of Congress. And judging by the preliminary assessments of political analysts, getting the bill approved will not be easy.
So, as we know, on Saturday, U.S. President Joe Biden and House Speaker Kevin McCarthy reached an "agreement in principle" to raise the federal debt ceiling to $31.4 trillion and limit government spending for the next two years. On Sunday, they expressed confidence that members of the Democratic and Republican parties will vote in support of the agreement. According to information from the American press, the negotiators have agreed to freeze non-defense budget spending next year at the current level and increase it by only one percent in 2025.
It should be noted that the "agreement in principle" does not guarantee a 100% final result. It is far from certain that congressmen from both parties will "buy in" and vote for the proposed bill. Previously, extreme right-wing Republicans and extreme left-wing Democrats opposed any compromise, which, by way, complicated the negotiations. Now this factor can disrupt the approval of the agreement between Biden and McCarthy in both chambers of the U.S. Congress.
Recall that at the end of last week, the U.S. Treasury Department clarified the date of a possible default in case Congress does not raise the debt ceiling (now Treasury Secretary Janet Yellen expects it on the 5th instead of June 1st). In other words, congressmen have exactly one week left. The compromise bill still needs to be approved by both houses of Congress, which will take at least three days. The bill itself is expected to be presented on Wednesday, May 31st. In other words, congressmen are running out of time, especially if internal party discussions around the document begin.
According to economists surveyed by Bloomberg, the limitation of government spending within the budget deal may further weaken economic activity, which is already being restrained by tightening monetary policy. The consensus forecast of respondents suggests that the U.S. economy will contract by 0.5% on an annual basis in both the third and fourth quarters of this year. According to one of JPMorgan's currency strategists, limiting budget spending during an economic downturn will increase pressure on GDP and weaken the labor market.
Monday—a quiet day
It cannot be said that the markets completely ignored the preliminary agreement on debt obligations. News from Washington, in particular, led to an increase in risk assets, including crude oil. For example, Brent crude futures rose by 66 cents, or 0.9%, to $77.61 per barrel.
However, judging by the dynamics of the major pairs in the "major group," the currency market is not rushing to draw conclusions, especially since the main trading platforms are closed today. All of this suggests that EUR/USD traders have practically not reacted to the recent political events.
Therefore, the current price fluctuations of the pair should be approached with great caution. During the European session on Monday, EUR/USD buyers attempted to develop a corrective growth, but quickly lost momentum: sellers once again took the initiative, although they also cannot boast of any significant success. The pair continues to drift near the base of the 7th figure.
Conclusions
In the current circumstances, opening trading positions either downside or upside is risky. Many trading platforms (both in the U.S. and in Europe) are closed, congressmen are still on vacation, and the actual bill will not be considered before May 31st. The prospects for its approval will become clear in the coming days, and the first "real" market reaction to the recent events will likely be seen only on Tuesday when the U.S. stock index futures markets and the U.S. bond markets resume their activity.
Therefore, it is advisable to adopt a wait-and-see position for the EUR/USD pair at the moment. The pair will enter a zone of turbulence in the near future, but determining the probable price movement for today is impossible: there are too many "unknowns" in this equation.
