FOREX Fundamental analysis for EURUSD on May 19, 2023
A big mistake in Forex trading is blind faith in some postulates. That year, when US inflation hit 40-year highs, gold, as a defensive asset, should have strengthened powerfully, but it only turned to growth with steady signs of declining US CPI and PCE. It's the same with the dollar. Many analysts call the threat of default as the main driver of the dollar's strengthening. But, the most active decrease of EUR/USD was when the risks of the financial collapse went down sharply.
After Joe Biden's confident statement that a deal between Republicans and Democrats will take place in the near future investors could breathe a sigh of relief. In addition, the reduced likelihood of a US economic slowdown suggests a continuation of the Fed's rate hike cycle. And this is not a bad support to the greenback.
Of course, both the banking crisis and the threat of default are holding back the Fed's tightening of monetary policy, especially given the regulator's 2021 measures to respond to a potential failure of the US government, which Jerome Powell called "disgusting."
In short, the national debt problem is a reason to move toward easing the Fed's monetary policy, so reducing the risk of default is a good reason for the dollar to strengthen.
Asset reaction to the US government debt impasse
But, the main driver of the dollar is likely to be expectations of an interest rate hike to 5.5% in June, with the possibility of a dovish reversal decreasing at the same time.
Where can the EUR/USD find ground beneath its feet? Earlier we estimated that the pivot level would be 1.076. The signals of the change in the Fed's monetary policy protect the pair from the fall. If they keep disappearing, there is a high probability that the Euro might slip to 1.066 and 1.060. We continue to keep the short positions.