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House approves bill to temporarily raise US debt ceiling

The EURUSD pair slipped 0.19% to 1.1530 on Tuesday, October 12.  The single currency rallied to a session high of 1.1570 during the European session, but failed to keep up the bullish trend. Economic sentiment indices in Germany and the euro area disappointed the market with lackluster performance. The further decline of the ZEW indicator of economic sentiment is mainly due to the persisting supply bottlenecks for raw materials and intermediate products.

The downtrend accelerated after the pair breached the 1.1550 support level and stopped at 1.1524. The DXY index rose due to depreciation of the euro. The main weight (57.6%) of the DXY is made up of the EURUSD pair. Antipodeans traded in positive territory against the US currency for a long time and also saw their positions eroded by the close. The dollar appreciated against major currencies, brushing aside a decline in the 10-year UST yield.

Todays macro agenda (GMT 3)

  • 09:00 UK: GDP, industrial production, manufacturing production, trade balance (August); Germany: harmonized inflation rate (September).
  • 12:00 Eurozone: industrial production (August).
  • 15:30 US: CPI (September).
  • 21:00 FOMC minutes.

Current outlook

Major currencies were trading in positive territory by the time of writing.  The kiwi and sterling topped the leaderboard, whereas the aussie came under pressure from a decline in iron ore prices. Other currencies may have strengthened on the news that the House of Representatives on Tuesday approved a bill to temporarily raise the US borrowing limit by $480 bln.

The bill is expected to be signed into law by US President Joe Biden before October 18. The federal government will remain funded through December and temporarily avert an unprecedented default that would wreak havoc on the economy.

Note that passage of the bill is a stopgap solution. Congress will review the issue again in early December. Republicans made it clear that the next ceiling debate would not be easier and warned Democrats not to expect any help from them.

Volatility will most likely be low until the North American session when the CPI and FOMC minutes come out. Market participants will be looking to the minutes for further guidance on when QE could start to be tapered.

Today’s lineup of speakers includes Brainard and Bowman from the Fed’s Board of Governors. Lael Brainard will deliver a speech on “Engaging Tribal Leaders on Financial Inclusion and the Economic Challenges of the Pandemic”. His speech is unlikely to have an impact on the market.

Michelle Bowman will deliver a presentation on "Monetary Policy Making and Economic Outlook." Her speech might have an impact on the dollar.

Bostic and Clarida spoke on Tuesday. Bostic said that the slowdown in US labor market should not derail the Fed’s taper timeline, while Clarida pointed out that the Fed has all but met its employment goal to move ahead with reducing its bond buying program. Yesterday’s Fedspeak cemented expectations that the regulator will start to taper QE as early as next month.

Technical analysis

Heightened demand for risk-sensitive assets was seen during the Asian trading session. A number of key events are scheduled for today, so uncertainty and swings in either direction can be expected on the FX market until Thursday.

Price action met resistance from various trendlines: one from the top of 1.1587, the trendline from the minimum of 1.1529 (yesterday was a support) and the 55-day SMA (balance line).

If the CPI print comes in weak, the euro will go up and a double bottom will start to shape up.  Then all eyes will be on the Fed minutes. The target for buyers is 1.1577. If something goes wrong and inflation overshoots the forecast, the target will drop below 1.1505.

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