The EURUSD pair is on the cusp of a major bearish breakout as risks of a US government shutdown rise and after the German election. The pair is trading at 1.1691, which is about 1.8% below the highest level in September.
Will the US default?
The US government could run out of money as soon as in October unless Congress votes to increase the country’s borrowing limit. On Monday, Senate Republicans blocked a bill that was intended to fund the government and raise the debt limit.
If a breakthrough is not reached by October 1, it will likely lead to a prolonged government shutdown. At the same time, the most dire issue is that the Treasury Department could lack the funds needed to pay the country’s debt.
This, in turn, could lead to a credit rating downgrade by agencies like Moody’s, S&P Global, and Fitch. If that happens, the US will see the cost of servicing its debt rise. It will also find it more difficult to raise money by selling government bonds.
A government default would be a bearish thing for the EURUSD pair because it would increase demand for the US dollar because of its safe-haven characteristics.
Jerome Powell, the Federal Reserve chair, will address these concerns when he testifies before Congress on Tuesday this week. He will also likely talk about last week’s decision, where the bank decided to leave interest rates unchanged.
In its decision last week, the bank hinted that tapering of asset purchases will likely happen in the coming months. The bank will start hiking rates later in 2022.
The next key catalyst for the EURUSD price is Sunday’s German election. The country’s election led to relatively tight results, with Social Democrats scooping about 25.3% of the total votes. They were followed by Angela Merkel’s CDU, which won about 24% of the votes.
Therefore, Olaf Scholz, the current finance minister will need to form a coalition with other minority parties. Because of the significant differences between most parties, the process of forming a coalition could take months. This is because these parties will need to find some common ground on key issues.
Therefore, the EURUSD could remain under pressure as investors wait for the outcome of these negotiations.
Key data ahead
The EURUSD will likely react to the important economic numbers later this week. On Tuesday, the US will publish the latest consumer confidence numbers. The data, by Conference Board, is expected to show that confidence made a modest improvement in September.
The pair will also react to the latest Eurozone consumer and business confidence data scheduled for Wednesday. These numbers are important because consumer spending is the biggest part of the European and American economies. Therefore, highly confident consumers lead to more purchases, which in turn leads to a strong economy.
Other key economic numbers this week will be the preliminary Eurozone inflation numbers and the final estimate of US GDP data.
The daily chart shows that the EURUSD is sitting at a key support level. The current price is along the lowest level on March 31st, 19th August, and in September. Therefore, there are signs that the pair is finding it difficult to move below the level of $1.16977.
At the same time, the price is slightly below the 25-day and 50-day exponential moving averages while the Stochastic Oscillator has moved to the oversold zone. Therefore, there is a probability that the pair will break out lower soon.