Forex Market: EUR/USD pinned near two-month low as US debt talks approach deal, Germany enters a recession

EUR/USD remained pinned near a two-month trough on Friday as investors awaited the outcome of US debt talks, while the common currency was pressured by confirmation that Germany’s economy plunged into a recession during the first quarter.

A final GDP estimate showed on Thursday that German economy had contracted at an annualized rate of 0.5% in the first quarter. That compares with a 0.1% contraction in the preliminary estimate. It has been the first GDP contraction since the first quarter of 2021, mostly driven by stubbornly high inflation and higher borrowing costs that adversely affected demand.

Meanwhile, the US Dollar was set to register a third consecutive week of gains against its major peers on expectations that interest rates in the US might remain higher for longer than originally anticipated.

Markets are currently pricing in an almost 52% chance of another 25 basis point interest rate hike by the Federal Reserve at its June policy meeting.

At the same time, expectations that the central bank will start reducing rates in 2023 have been scaled back.

The situation surrounding debt ceiling negotiations between U.S. President Joe Biden and Republican Kevin McCarthy continued to weigh on market sentiment only a week before the “X-date” on June 1st, when the US government would not be able to cover its obligations.

President Biden and House Speaker McCarthy on Thursday appeared to be moving closer to an agreement, which would raise the debt ceiling for two years and cap spending on most items other than military and veterans.

“While the probability of a technical default is very low, it appears to be materially higher than in past debt ceiling stand-offs due to the current political landscape,” Jake Jolly, BNY Mellon Investment Management’s head of investment analysis, was quoted as saying by Reuters.

“Political brinksmanship going down to the wire adds immediate-term uncertainty.”

As of 8:44 GMT on Friday EUR/USD was inching up 0.08% to trade at 1.0734. Yesterday the major Forex pair went down as low as 1.0707. The latter has been the pair’s weakest level since March 21st (1.0704).