- The Euro extends the downward bias vs. the US Dollar.
- European stocks appear mixed early in Europe.
- Final Inflation Rate in Germany matched the flash readings.
The Euro (EUR) continues its decline against the US Dollar (USD), forcing EUR/USD to retreat further and revisit the 1.0670 zone on Wednesday.
On the other hand, the Greenback gains further strength, pushing the USD Index (DXY) to the vicinity of 105.80 on the back of persistent weakness in the overall risk environment, while US yields appear side-lined so far.
In terms of monetary policy, there is a growing consensus among market participants that the Federal Reserve (Fed) is likely to keep its current monetary stance unchanged for the time being. The possibility of an interest rate adjustment in December has lost some momentum, especially after the recent FOMC meeting and the release of weaker-than-expected Nonfarm Payrolls data for October (+150K jobs).
A similar sentiment can be observed regarding the European Central Bank (ECB), as investors currently lean towards an extended impasse in its tightening measures, most likely until the latter part of next year.
On the euro calendar, final Inflation Rate in Germany showed the CPI rising 3.8% YoY in October and coming in flat on a monthly basis. Later in the session, Retail Sales in the broader euro area are also due.
Across the pond, usual Mortgage Applications measured by MBA are due seconded by Wholesale Inventories. In addition, investors are expected to closely follow the speech by Chair Jerome Powell, especially amidst growing chatter about potential rate cuts by the Fed as soon as in the summer of 2024 vs. the persevering tighter-for-longer narrative seen in some Fed speakers.
Later in the session, NY Fed John Williams (permanent voter, centrist), FOMC Governor Michael Barr (permanent voter, centrist) and FOMC Governor Philip Jefferson (permanent voter, centrist) area all expected to speak as well.
Daily digest market movers: Euro remains on the defensive on Dollar gains
- The EUR comes under extra pressure vs. the USD.
- US and German yields trade in an inconclusive tone so far.
- Markets see the Fed maintaining its monetary policy intact in December.
- An extended pause appears likely by the ECB until H2 2024.
- Geopolitical worries in the Middle East remain well in place.
- Focus is expected to be on Chair Powell’s speech.
Technical Analysis: Euro faces an interim support around 1.0645
EUR/USD corrects lower and revisits the sub-1.0700 zone on Tuesday.
The continuation of the selling pressure could force EUR/USD to initially revisit the weekly low of 1.0495 (October 13), ahead of the 2023 bottom at 1.0448 (October 15) and the round number of 1.0400.
On the upside, the immediate resistance emerges at the November high of 1.0754 (November 6) prior to the key 200-day SMA at 1.0802 and another weekly top of 1.0945 (August 30). North from here aligns the psychological threshold of 1.1000 before the August peak of 1.1064 (August 10) and the weekly high of 1.1149 (July 27), all preceding the 2023 top of 1.1275 (July 18).
So far, the pair’s outlook is expected to remain bearish as long as it trades below the 200-day SMA.
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%).
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.
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.
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.
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.