- The Euro appears mildly offered against the US Dollar.
- Stocks in Europe open Tuesday’s session with marked gains.
- EUR/USD hovers around the 1.0550 region on Tuesday.
- The USD Index (DXY) clings to daily gains above 106.00.
- ECB President Christine Lagarde speaks later in the session.
The Euro (EUR) adds to the weakness seen at the beginning of the week against the US Dollar (USD), resulting in a decline of EUR/USD to the 1.0550 region on Tuesday.
In contrast, the Greenback manages to bounce off earlier lows near 105.90 when tracked by the USD Index (DXY), against the backdrop of persistent geopolitical turmoil in the Middle East and the subsequent pickup in risk aversion.
Regarding monetary policy, investors anticipate that the Federal Reserve (Fed) will maintain interest rates at their present levels for the remainder of the year. Simultaneously, there is persisting speculation in the market regarding the potential for the European Central Bank (ECB) to pause its interest-rate hiking cycle, despite inflation levels surpassing the bank’s target and mounting concerns about the possibility of a future recession or stagflation in the European region.
On the euro docket, ECB’s President Christine Lagarde will speak at the IMF/World Bank meetings.
In the US, the NFIB Business Optimism index is due, seconded by Wholesale Inventories and speeches by Atlanta Fed President Raphael Bostic (2024 voter, hawk), FOMC Governor Christopher Waller (permanent voter, hawk) and Minneapolis Fed Neel Kashkari (voter, centrist).
Daily digest market movers: Euro on the defensive amidst risk-off mood
- The EUR adds to Monday’s decline against the USD.
- US and German yields attempt a tepid rebound.
- Investors believe the Fed will hold off on hiking rates in the coming months.
- Markets anticipate that the ECB will halt its rate rise campaign.
- Escalating concerns around the Middle East support the risk-off trade.
- Speculation of USD/JPY intervention remains strong.
Technical Analysis: Euro’s upside looks limited around 1.0600
EUR/USD adds to the pessimism seen at the beginning of the week, revisiting the 1.0550 zone on Tuesday.
The persistence of selling pressure on the EUR/USD could lead to a retesting of the 2023 low at 1.0448 seen on October 3 and may even challenge the significant psychological level of 1.0400. Should this level be breached, it could open the door for a retest of the lows at 1.0290 (November 30, 2022) and 1.0222 (November 21, 2022).
On the other hand, if the pair gains upside impulse, its next target could be the 1.0617 from September 29, followed by the important 200-day Simple Moving Average (SMA) at 1.0823. If the latter is breached, there is potential for the pair to test the august 30 top at 1.0945 and approach the psychological barrier of 1.1000. Further breakthroughs beyond the August 10 peak of 1.1064 might bring the pair to the July 27 high of 1.1149 and potentially reach the 2023 top at 1.1275 from July 18.
As long as the EUR/USD remains below the 200-day SMA, there is the possibility of continued downward pressure.
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.