EUR/USD clings to multi-day low near 1.0740 as US debt limit negotiations fuel cautious mood

• EUR/USD licks its wounds at the lowest levels in two month.
• Fears of US default amplify even as policymakers cite progress in debt ceiling extension talks.
• FOMC Minutes came in mixed but Fed policymakers appear hawkish enough to propel US Dollar, yields.
• Revisions of German, US Q1 GDP, other second-tier data can also entertain Euro traders.

EUR/USD remains on the back foot around mid-1.0750s as Euro bears take a breather at the lowest levels since late March during the mid-Asian session on Thursday.

In doing so, the Euro pair prods a two-day downtrend amid cautious markets. It’s worth noting, though, that the recently escalating fears of the US default on its debt payments looming in early June challenge the market’s sentiment and weigh on the EUR/USD. Even so, the policymakers’ optimism of getting the debt ceiling extension deal and mixed Fed comments allow the US dollar to stabilize at a multi-month high.

That said, the US Dollar Index (DXY) seesaws around a nine-week high by tracing firmer Treasury bond yields. However, the latest improvement in the S&P500 Futures, despite a downbeat Wall Street close, puts a floor under the EUR/USD prices.

On Wednesday, US House Speaker Kevin McCarthy said that they are sending their negotiators to the White House to try and finish up debt-limit talks. However, reports took rounds that the US House members will go back to their homes after Thursday, to cheer the long weekend, before resuming the debt ceiling negotiations, which in turn escalates the fears of no deal before late May.

The fears of US default push global rating agencies like Fitch and Moody’s to turn cautious about the US credit rating status. Late on Wednesday, Moody’s warned about the US outlook change while Fitch put US’ AAA on Rating Watch Negative status.

On the other hand, the Minutes of the latest Federal Open Market Committee (FOMC) Meeting suggested that the policymakers aren’t on the same table as some suggest it is appropriate to hike the rates while others advocate for a policy pivot.  Though, Atlanta Fed President Raphael Bostic said, “‘We’re right at the beginning of the hard part’ of taming inflation.” On the same line, Federal Reserve Governor Christopher Waller mentioned that he doesn’t support stopping rate hikes unless getting clear evidence that inflation is moving down toward the 2% objective.

At home, the German IFO Business Climate Index eased to 91.7 in May from 93.4 in April, versus the market expectation of 93. Following the release of the German IFO Business Survey, the institute’s Economist Klaus Wohlrabe said that the “German economy heading towards stagnation in Q2.”

Moving on, the second readings of the US and German Q1 GDP will join the US weekly Jobless Claims, the Chicago Fed National Activity Index and Pending Home Sales to decorate the economic calendar. However, major attention will be given to the US debt ceiling talks.

Technical analysis

An upward-sloping support line from late November 2022, close to 1.0690 by the pres time, could challenge EUR/USD bears amid nearly oversold RSI (14) conditions.