EUR/USD retreats towards 1.0700 despite initial US debt ceiling deal, US NFP, Eurozone inflation eyed

• EUR/USD fades the previous day’s bounce off 10-week low.
• US policymakers offer initial debt ceiling extension agreement but the road through Congress is bumpy.
• US data favor hawkish Fed bets, ECB policymakers appear undecided.
• US House, Senate voting on debt ceiling, NFP and Eurozone inflation are the key to watch during holiday shortened week.

EUR/USD stays defensive around 1.0720-30 despite the US policymakers’ initial victory in avoiding the ‘catastrophic’ default. In doing so, the Euro pair grinds higher following a corrective bounce off the lowest levels since March 20, marked the previous day, but fails to gather upside momentum amid mixed feelings and holidays in the US and most of the Eurozone on Monday.

US President Joe Biden and top congressional Republican Kevin McCarthy reached a tentative deal to raise the federal government's $31.4 trillion debt ceiling through January 2025. The deal, however, lacks support from some of the extreme leftists and rightists due to the compromise each party had to do to reach the agreement. It should be noted that the debt ceiling deal needs to pass through the House on Wednesday and the Senate by June 05 to avoid the looming ‘catastrophic’ default. Hence, optimism surrounding the first step of overcoming the default fades and exerts downside pressure on the EUR/USD pair.

Apart from the US debt ceiling fears, upbeat US data and comments from the International Monetary Fund Managing (IMF) Director Kristalina Georgieva also prod the EUR/USD bulls, not to forget mixed statements from the European Central Bank (ECB) Officials.

In the last week, US PMIs, the second estimate of the first quarter (Q1) 2023 Gross Domestic Product (GDP), Durable Goods Orders and the Core Personal Consumption Expenditure (PCE) Price Index for the said month, known as the Fed’s preferred inflation gauge, marked upbeat details in their latest readings. On Friday, US Durable Goods Orders for April came in better-than-forecast to 1.1% from 3.3% prior, versus -1.0% expected. Further, Nondefense Capital Goods Orders ex Aircraft, also known as the Core Durable Goods Orders, marked upbeat growth of 1.4% compared to -0.2% anticipated and -0.6% previous readings. Additionally, the Core PCE Price Index for the said month rose past market forecasts and previous readings of 0.3% MoM and 4.6% YoY to 0.4% and 4.7% in that order.

Considering the data, IMF’s Georgieva stated that the US interest rates will need to be higher for longer. Alternatively, Federal Reserve Bank of Cleveland President Loretta Mester said that the Personal Consumption Expenditures (PCE) Price Index released on Friday underscored the slow progress on inflation. During the weekend, Federal Reserve Bank of Chicago President Austan Goolsbee welcomed the US debt ceiling news while also saying, amid the CBS Show “Face the Nation”, “I try to make it a point not to prejudge and make decisions when you are still weeks out from the meeting."

On the other hand, European Central Bank (ECB) policymaker, Boris Vujčić, said on Friday, “Inflation momentum is still persistent.” The ECB member also added that it is questionable if we will be able to get to 2% in the next two years. On the other hand, ECB Chief Economist, Philip Lane said that (there is) no sense of certainty in terminal rate.

Furthermore, the last week’s downward revision to the German growth numbers renewed recession fears in the bloc and prod the ECB hawks, which in turn allowed the EUR/USD bears to remain hopeful ahead of the key week comprising US jobs report and Eurozone inflation.

Also read: EUR/USD Weekly Forecast: A debt ceiling deal can save bulls

Technical analysis

Friday’s Doji candlestick above the 200-day Exponential Moving Average (EMA), around 1.0685 by the press time, tests EUR/USD bears. However, the likely corrective bounce needs validation from the 61.8% Fibonacci retracement of its March-April upside, near 1.0740 at the latest.