Euro analysis: Is EUR/USD breaking out after the debt ceiling deal?

EUR/USD takeaways

The US debt ceiling deal was priced in and is not providing a boost for US assets as traders return from a long holiday weekend.
US Consumer Confidence came in above expectations at 102.3 vs. 99.1 expected.
EUR/USD is rallying out of May’s falling wedge pattern, potentially opening the door for a bullish week and a potential rally toward 1.0830.

EUR/USD fundamental analysis

By now, readers know that the big news over the holiday weekend is that President Biden and Speaker McCarthy’s negotiating teams have reached an agreement over the debt ceiling, clearing the way for a vote on the deal tomorrow. The deal is centered around an agreement to suspend the debt ceiling entirely until 2025, caps on non-defense spending increases, and minor tweaks to certain welfare programs.

The market had already sniffed out the likely agreement based on last week’s positive chatter, so we’re not seeing much of a reaction in the US dollar or US indices. Assuming the debt ceiling deal passes through Congress as expected, traders may shift their focus to a potential “fiscal drag” on the economy as the Treasury issues ~1T in new bonds to refill its coffers in the next couple of months.

As we go to press, the US Conference Board Consumer Confidence report has just been released, with the headline print coming in at 102.3 vs. 99.1 eyed and 101.3 last month, though the market impact of the release has been minimal so far.

Meanwhile, across the Atlantic, there was little in the way of European economic data to drive markets coming back from a long holiday weekend. The lone notable data release was the flash reading on Spanish CPI, which came in below expectations at 3.2% y/y vs. 3.6% eyed, but conditions in the 4^th largest economy in the Eurozone rarely drive policy or price action.

Euro technical analysis – EUR/USD 4-Hour Chart

Source: Tradingview, StoneX

Looking at the 4-hour chart, EUR/USD is finding some support at its late March low near 1.0710. The pair has been declining within a falling wedge pattern for the entire month of May, but today’s bullish move off support suggests we may finally be breaking out of that pattern. If the pair can finish the day near current levels or higher, it would signal a likely rally from here, with room up toward previous support/resistance in the 1.0830 area.

Meanwhile, a break below the overnight low near 1.0680 would invalidate the falling wedge breakout and hint at a continuation toward 1.0600 next.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX

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