Deutsche Bank sees lower policy risk supporting euro amid debt ceiling focus

Deutsche Bank believes the upcoming U.S. debt ceiling increase, backed by a Democratic Congress and President Trump's cooperation, will lower policy risk and stabilize the euro. Over the past two days, Trump has indicated no imminent attack on Iran, attributing part of the election outcome to the ongoing war. As oil flows in the Middle East return to normal levels, the market is pricing in a significant risk premium for a potential escalation and disruption in energy supply.

For Deutsche Bank, the debt ceiling represents the most significant source of domestic policy uncertainty in the U.S., set to become binding in the second quarter of next year. Republicans plan to pass the debt ceiling increase through reconciliation in the coming weeks. A successful debt ceiling increase would eliminate an extra layer of fiscal policy uncertainty and prevent AI and other policies from being intertwined in a prolonged negotiation with a Democratic Congress.

The bank sees political developments as beneficial for the EUR/USD, anticipating a continued drop in the euro against the dollar due to reduced energy and global policy risk premiums. However, higher AI implementation risks could weaken the dollar overall, especially if a debt ceiling increase fails to pass this year.