The economic calendar for the week is filled with important events, not only of a macroeconomic nature but also of a political nature. Traders of dollar pairs are focused on the US debt limit. It appears that the culmination of the protracted political drama, centered around the possibility of a default, is approaching.
The expected "Happy End" could weigh on the safe-haven dollar, which has seen increased demand as a protective asset over the past two weeks amid rising risk-off sentiment. Once the politicians reach a deal and it is approved by both chambers of Congress, the fundamental backdrop for dollar pairs will significantly change. The focus will once again shift to "classic" fundamental factors that could alter the situation for dollar pairs. Moreover, key reports will be released for both the greenback and the European currency in the coming days.
"Deal of the Year"
U.S. President Joe Biden and Speaker of the House Kevin McCarthy have reached a "tentative agreement" on raising the country's debt ceiling. According to American media reports, a two-year budget deal takes a central place in the agreement, whereby spending in 2024 will remain the same and will increase by 1% by 2025 in exchange for a two-year debt limit increase.
On one hand, the information is extremely optimistic, as the parties have finally found common ground. But according to experts surveyed by Reuters, it is still too early to celebrate victory based on how the deal is described. Political analysts predict a challenging path for the final decision in the U.S. Congress, as the proposed deal would raise the debt limit for two years at a time. Biden, in turn, stated that the compromise bill would mean that not everyone gets what they want.
Thus, it appears that the debt limit issue will come to an end next week. The safe-haven dollar may face pressure amid growing risk sentiment. However, if Congress struggles to pass the aforementioned bill (which is quite likely), the dollar will continue to hold steady until the issue is ultimately resolved. Once the question is resolved, the focus will shift back to "classic" fundamental factors.
Key releases of the week
It is worth noting that we have a short work week ahead, as there is nothing scheduled for Monday. The United States will observe Memorial Day, and it's Trinity Sunday in Europe. Therefore, the main events in the currency market will unfold starting from Tuesday, May 30. The most important macro data of the day is the CB Consumer Confidence index for the United States. This indicator fell to 101.3 (the weakest reading since July 2022) in April, and the downtrend is seen to continue in May, with the index projected to decrease to 99.2 points. Tuesday will also draw attention to the dynamics of the German import price index and the U.S. S&P/Case-Shiller Home Price Index for the 20 largest cities.
On Wednesday, the main macro data for the EUR/USD pair will come from Germany. Specifically, key data on German inflation growth will be published on this day. A slowdown in the main indicators is expected. The Consumer Price Index on a yearly basis is expected to come in at 7.0% (down from the previous value of 7.2%). If the report comes out in the "green," it will be a cause for concern for EUR/USD bears, as German inflation correlates with the dynamics of the eurozone CPI. The German labor market report will also be released on Wednesday. According to preliminary forecasts, the unemployment rate is expected to decline to 5.5%.
The highlight of Thursday will be the European inflation report. The eurozone CPI report has been declining for the past five months but accelerated again in April, reaching 7.0% YoY. According to general forecasts, the indicator is expected to remain at the April level of 7.0% in May. The situation with the core CPI is mirror-like: after months of consecutive growth, the indicator slowed down to 5.6%. Forecasts suggest that the core index may resume its uptrend in May, rising to 5.7% (according to other estimates, up to 5.8%).
Nonfarm Payrolls will be another significant event of the week for traders. It is worth noting that the previous report, which was published in early April, favored the greenback. All components of the April report came out in the "green." For example, the nonfarm employment change figure reached 253,000, significantly exceeding preliminary forecasts (170-180,000). Contrary to expectations of an increase to 3.7%, the unemployment rate decreased to 3.4%.
According to preliminary forecasts, May's Nonfarm Payrolls will show a weaker result. In particular, the unemployment rate in May is expected to slightly increase to 3.5%. The number of employed in the nonfarm sector is forecasted to grow by 160,000. If this figure reaches that level, it will be a rather weak result. The inflation component of Nonfarm Payrolls (average hourly earnings) is expected to show a downtrend. In monthly terms, the indicator is projected to grow by 0.4% (compared to the April value of 0.5%), and on a yearly basis, by 4.2% (down from the April value of 4.4%).
There is no doubt that, until a certain point, the tone of the market will be set by Washington - that is, by American politicians who will either reach a deal in the coming days or embark on the most absurd political adventure in recent US history.
I assume that the parties will eventually reach a deal, possibly at the last moment (considering the time gap for the approval of the bill in Congress), but they will still reach an agreement. In that case, "classic" fundamental factors will come to the forefront. In the context of the upcoming week, this includes the eurozone inflation report and Nonfarm Payrolls. If the European report comes out in the "green," hawkish expectations regarding the European Central Bank's further actions will significantly increase - the market will once again discuss the possibility of a 50-point rate hike at the next meeting. Such discussions will support the single currency.
The dollar, on the other hand, needs strong support from Nonfarm Payrolls. Federal Reserve Chairman Jerome Powell's dovish comments and the dovish tones in the minutes of the Fed's May meeting indicate that the US central bank is ready to adopt a wait-and-see position at the June meeting. Weak Nonfarm Payrolls will only increase concerns in this regard.
However, I reiterate that "classic" fundamental factors will only come back into play after the US Congress raises the debt limit, putting an end to the worn-out negotiation saga.