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

Deutsche Bank says the combination of a Democratic congressional majority and President Trump’s willingness to work with the opposition should reduce risk premia and act as a brake on extreme policy outcomes.

The bank notes that over the last 48 hours, President Trump stated that no attack on Iran is imminent and acknowledged that the Iran war drove part of the election outcome.

With oil flows through the Middle East having materially recovered, the market is pricing a large imminent risk premium of re-escalation and energy supply disruption.

Deutsche Bank identifies the debt ceiling as the single biggest source of domestic policy uncertainty remaining in the U.S., with the limit becoming binding by Q2 of next year. Republicans reportedly aim to pass a debt ceiling increase via reconciliation over the next few weeks.

The bank says a successful debt ceiling increase would remove one additional layer of uncertainty on fiscal policy while preventing AI and other policy matters from getting bundled up in a protracted negotiation with a Democratic Congress. Question marks around the build-out of AI will likely persist regardless.

Deutsche Bank sees political developments as supportive of a continued bottoming out in EUR/USD. Lower energy and global policy risk premium but higher AI implementation risks should on balance weaken the dollar, with a failure to pass a debt ceiling increase this year considered an added dollar negative.