EUR/USD gains on Fitch warning

News that the US government has yet again failed to reach an agreement on the debt-ceiling extension has prompted Fitch ratings agency to put the US on credit watch.

There has been a small drop back in the US dollar on this news, but moves in the EUR/USD pair have been rather tame.

Over in the bond market, there have been significant moves in one-month Treasury bills, with rates pushing higher to 0.4%. This is a lower yield than can be achieved on two-year debt, which ultimately indicates that the risk of default is being priced in.

CPI for the eurozone remains well below the 2% ECB target and it would seem the expectation that chief Mario Draghi will embark on a new LTRO (Long-term refinancing operation) to boost liquidity and the deflationary issue is keeping a cap on gains.

$1.3570 is the key level of resistance for now and any close above that will see the $1.36 level retargeted. On the downside, the $1.3480 level is providing support to the single currency. The current tight range witnessed intraday may be set to change later this afternoon given all the macro releases and influential statements are due following the London close.

The NAHB housing index is released at 3pm (London time) and is expected to remain static at 58. Anything higher than this may see the dollar gain. The Beige Book is always a traders’ favourite, and while nobody is expecting a hike in US base rates anytime soon, it may provide some clues to the (very unlikely) prospects of QE tapering this year.

Head of the Kansas City Federal Reserve, Esther George, is due to speak later. She has a reputation as someone who is rather hawkish so her comments will be also of interest. Mario Draghi will also be speaking in Frankfurt, and we can expect to see him answer some questions on the potential for LTRO.

Spot FX EUR/USD (DFB) chart

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