Negotiators from both Republican and Democratic parties in the U.S. Senate have agreed to temporarily extend government funding to avoid a shutdown after October 1st. This was reported today by Bloomberg, citing its sources in Congress. In theory, this news should have mitigated the rise in risk aversion observed on Monday; however, it did not. Bloomberg's insider information did not impact the overall market situation. In particular, foreign exchange traders essentially ignored this news, as the safe-haven dollar continues to enjoy increased demand, allowing bearish sentiment on the EUR/USD pair to dominate.
So, what is the reason for such a weak reaction to this quite significant news? In my view, there are several reasons—First, the parties were unable to resolve the situation as a whole but merely postponed the onset of a shutdown. Moreover, even according to preliminary agreements, the funding is planned to be extended not until December (as was previously planned) but for a shorter period, ranging from three to six weeks.
Second, it is essential to remember that besides the Senate, there is also the House of Representatives, which is controlled by Republicans. The mentioned bill on temporary funding may be voted on today during the American Tuesday session. If the senators indeed reach a compromise and vote for this project, it will be sent to the House of Representatives, where there may be problems even before the vote.
The point is that the Speaker of the House of Representatives, Kevin McCarthy, risks incurring the wrath of the ultra-conservative Republicans (the so-called "Trumpists") if he decides to hold a vote on this issue. This "righteous anger" could lead to an attempt to remove McCarthy from office. All previous attempts to advance bills that would allow the U.S. government to operate after October 1st were effectively blocked by the "Trumpists" in the House of Representatives.
Considering that the Republican Party has only 221 votes in the lower house of Congress (while the Democrats have 212), so-called "moderate" Republicans cannot ignore the demands of their fellow party members, the "Trumpists" (without their support, they cannot pass any bills). Consequently, the fact of a preliminary agreement between Democrats and Republicans in the Senate, as reported by Bloomberg insiders, does not indicate a resolution to the problem. The battle is just beginning, and the main political battles will take place not in the Senate but in the House of Representatives.
In essence, for this reason, EUR/USD traders reacted quite skeptically to today's news, considering the changed political landscape in Congress following the midterm elections.
Currently, sellers of the pair are testing the support level of 1.0600, attempting to establish themselves below this target. Their attempts are somewhat feeble – traders are more besieging this price barrier than storming it. Short-term forays into the 1.05 region are ending with short corrective rebounds. In this case, one could speak of a "reconnaissance in force," so short positions on the EUR/USD pair still appear risky.
Overall, the established fundamental backdrop supports a downward movement. Key macroeconomic reports for this week (inflation in the Eurozone and the core PCE index) will be published on Friday, while the current news flow either briefly supports EUR/USD buyers (e.g., IFO indices) or strengthens sellers' positions. Specifically, yesterday, several representatives of the ECB indicated that the European regulator has no intention of raising interest rates further but is prepared to keep them at the current level for "as long as necessary."
European Central Bank President Christine Lagarde, who spoke in the European Parliament yesterday, added additional pressure on the euro. She stated, among other things, that the latest macroeconomic reports "point to further weakening of economic activity in the third quarter."
Commenting on recent inflation trends, Lagarde reiterated the ECB's forecast that inflation would remain "too high for too long," despite some signs of slowing down. However, Lagarde did not announce (possible) steps towards additional monetary tightening. Instead, she reiterated the key message of the September meeting—that the central bank is ready to keep rates at the current level for an extended period.
Thus, the "fundamentals" for the EUR/USD pair continue to favor the bears. The ongoing tension in the markets and the rise in U.S. Treasury yields provide support to the dollar, while comments from ECB representatives weigh on the common currency.
However, as mentioned earlier, short positions on the pair are currently risky, as the price has approached the 1.0600 support level closely. Sellers are actively testing this price barrier but have not been able to establish themselves below this target yet. In my view, considering selling positions is advisable only after EUR/USD bears not only break through 1.0600 but also drop below 1.0580 (the lower Bollinger Bands line on the four-hour chart). In such a case, the primary target for the downward movement in the medium term will be the 1.0520 level—the lower Bollinger Bands line coinciding with the upper boundary of the Kumo cloud on the D1 timeframe.
