16.08.202113:18 Forex Analysis & Reviews: Democrats are threatened by rising US debt. Demand for euro and pound picks up.

A new problem that could shock the financial markets is the increase of US public debt limit. Democrats are expecting Republicans to raise the ceiling before it expires - a very risky bet after recent confrontations and the adoption of the new infrastructure bill. If this happens, the health of the financial markets, as well as the further plans of Democrats, could be seriously undermined. There will also be significant corrections, primarily in the stock market, if the government is forced to suspend work due to lack of funding. President Joe Biden's economic agenda may also be halted.

Last week, Democrats missed out on a chance to raise the debt ceiling through the Senate, opting instead to go through the normal legislative process. They said they should not be solely shouldering the burden of the national debt, which is partly the result of tax cuts they opposed when the Republicans were in power. But Senate Republican leader Mitch McConnell said that his party opposes most of Biden's spending and tax plans and will not help raise the debt limit. According to McConnell, the Democrats could have just included in their budget resolution an increase in the national debt limit, but chose instead to shift some of the responsibility to the Republican Party.

Meanwhile, Treasury Secretary Janet Yellen warned the Congress to be more proactive, saying that senators must pass at least temporary changes so that the government remains open after September 30. At the latest, 46 GOP senators signed a letter saying they would not vote to increase the debt limit, while some Republicans are still talking about a compromise.

On a different note, demand for dollar deteriorated further amid strong corporate earnings results and optimism about global economic recovery. At the same time, Treasury yields declined, albeit slightly. It seems that investors are awaiting new hints from the Fed regarding a cut on bond purchases, but this has little chance to happen since core inflation slowed down.

In Europe, a report on foreign trade balance was released last Friday, which showed better-than-expected figures. Eurostat said the trade surplus eased slightly to € 12.4 billion in June amid a 0.7% fall in exports. Imports, on the other hand, remained stable. All in all, the surplus from January to June was € 102.5 billion, which is significantly higher than the € 86 billion last year. The annual growth of exports was 15.5%, while imports was 15.2%.

There was also CPI data from France, which coincided with forecasts. The figure showed that that growth slowed down partially, leaving a lot of room for the European Central Bank to manage monetary policy. Insee said year-on-year CPI was only 1.2% in July, while month-over-month CPI rose by only 0.1%. The EU-harmonized inflation also fell to 1.5%, partly due to industrial prices slipping by 1.1% and food prices rising by only 0.1%. Service prices, meanwhile, jumped 0.7%.

Going back to US, the Department of Labor reported that import prices rose less than expected in July, which suggests that partial problems in supply chains are gradually being addressed. Thus, the indicator only rose 0.3% in July, after rising 1.1% in June. Export prices also climbed by 1.3% percent, after increasing by 1.2% in the previous month.

With regards to EUR/USD, a lot depends on 1.1780 and 1.1760 because rising above it will continue the bull market. Most likely, it will lead to a jump to 1.1830 and 1.1860. But if pressure returns on the pair, price could drop to 1.1730, and then to the base of the 17th figure.

GBP

Pound rallied last Friday, winning back all the losses it had the previous day, when UK Treasury Secretary suddenly changed his position on measures to support the economy. During an interview, Sunak said he is ready to work with Prime Minister Boris Johnson, who is a supporter of massive stimulus measures.

But today, a lot depends on 1.3840 because rising above it will result in a further hike towards 1.3890, or even to 1.3955. Meanwhile, a decline below the level will push GBP/USD down to 1.3815 and 1.3790.