Euro comes under some mild pressure near 1.0750 ahead of US CPI
- The Euro navigates within a narrow range vs. the US Dollar.
- Stocks in Europe kicked off the session broadly on the defensive.
- EUR/USD’s weekly recovery seems to have been capped around 1.0770.
- The USD Index (DXY) continues to target the 105.00 region.
- EMU Industrial Production comes next on the domestic docket.
- Investors’ attention will be on the release of US inflation figures.
The Euro (EUR) appears offered against the US Dollar (USD) following Wednesday’s opening bell in the old continent, prompting EUR/USD to trade with slight losses in the mid-1.0700s so far.
On the USD-side of the equation, the Greenback pays another visit to the 104.70/80 band when tracked by the USD Index (DXY), helped by a mild uptick in US yields across different maturities ahead of the publication of key US inflation readings for the month of August.
In terms of monetary policy, the anticipation of a potential interest rate hike by the Federal Reserve (Fed) in November seems to have waned recently, while market participants persist in factoring in the likelihood of rate cuts taking place at some stage in the second quarter of 2024.
Turning our attention to the European Central Bank (ECB), market discussions seem to lean towards a pause at the September 14 meeting and a quarter-point rate raise by year’s end, given the current state of a somewhat divided Council.
Looking at the euro docket, Industrial Production readings for the broader euro area will be the sole release later on Wednesday. Across the ocean, the usual weekly Mortgage Applications measured by MBA and the EIA’s report on crude oil inventories are also due, apart from the US CPI prints.
Daily digest market movers: Euro remains prudent ahead of US CPI
- The EUR fades part of the recent advance vs. the USD.
- US and German yields manage to pick up some upside traction.
- Markets see the ECB keeping the deposit rate unchanged this week.
- UK GDP results missed estimates in July.
- Markets keep adjusting to potential rate cuts by the Fed in Q2 2024.
- Producer Prices in Japan rose more than expected in August.
- The PBoC will promote measures to stimulate demand.
Technical Analysis: Euro risks extra losses while below the 200-day SMA
EUR/USD’s weekly recovery seems to have met a decent resistance area around 1.0770 for the time being.
If EUR/USD manages to break below the September low at 1.0685 (September 7), it may enter a phase of retesting the May low at 1.0635 (May 31) before potentially reaching the March low at 1.0516 (March 15). A breach of the latter level could initiate a possible examination of the 2023 low at 1.0481 (January 6).
On the other hand, the current focus is on targeting the crucial 200-day SMA at 1.0826. Beyond that point, a bullish momentum might lead to a challenge of the weekly peak at 1.0945 (August 30), further supported by the provisional 55-day SMA at 1.0935. Subsequently, this scenario could pave the way for an advance towards the psychological level of 1.1000 and the August high at 1.1064 (August 10). If the spot clears this area, it could alleviate some of the bearish pressure and potentially aim for the weekly peak at 1.1149 (July 27), followed by the 2023 top at 1.1275 (July 18).
It is important to note that as long as the EUR/USD remains below the 200-day SMA, there is a possibility of a sustained decline in the pair.
Euro FAQs
What is the Euro?
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.
EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
What is the ECB and how does it impact the Euro?
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.
The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
How does inflation data impact the value of the Euro?
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control.
Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
How does economic data influence the value of the Euro?
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.
A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.
Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
How does the Trade Balance impact the Euro?
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.