EUR/USD rallies as US Dollar tumbles, ECB policy in focus
|- EUR/USD moves higher to near 1.0950 as investors see a September Fed rate cut as a done deal.
- Better-than-expected US Retail Sales report fails to diminish Fed rate-cut prospects.
- The ECB is expected to leave interest rates unchanged on Thursday.
EUR/USD reaches a four-month high near 1.0950 in Wednesday’s American session. The major currency pair extends gains after recovering its losses on Tuesday, driven by the better-than-expected United States (US) Retail Sales report for June.
Data showed on Tuesday that monthly Retail Sales remained unchanged, as expected, as lower receipts at auto showrooms were offset by robust demand for core goods. The Retail Sales Control Group, a key measure of consumer spending component of Gross Domestic Product (GDP) that excludes receipts from auto dealers, building-materials retailers, gas stations, office supply stores, mobile home dealers, and tobacco stores, rose at a stronger pace of 0.9% than the former release of 0.4%.
The US Census Bureau also revised May’s Retail Sales reading to 0.3% from 0.1%, adding to economic strength. Though the Retail Sales report has emerged better than estimates, it is unable to weaken firm speculation that the Federal Reserve (Fed) will start reducing interest rates from the September meeting.
Traders see the gossip of rate cuts in September as a done deal due to cooling inflationary pressures and easing labor market strength. The recent consumer inflation report for June signaled that the disinflation process has resumed after a hiatus in the first quarter of the year.
Also, recent commentary from Fed officials has indicated that their confidence in inflation declining to the bank’s target of 2% has improved. On Tuesday, Fed Governor Adriana Kugler signaled cautious optimism that inflation is on the path to return to the bank’s target of 2%. Kugler acknowledged progress in disinflation in all three categories: goods, services and now housing, Reuters reported.
Daily digest market movers: EUR/USD rises as US Dollar slumps on firm Fed rate-cut prospects
- EUR/USD is expected to trade cautiously with a focus on the European Central Bank’s (ECB) monetary policy meeting, which is scheduled for Thursday. The ECB is expected to leave interest rates unchanged. Therefore, investors will pay close attention to commentary on the interest rate outlook to know when the ECB will cut interest rates again.
- The ECB delivered its first rate cut in June after maintaining a restrictive interest rate framework for two years to tame hot inflationary pressures driven by coronavirus pandemic-led stimulus. ECB officials voted to roll back the tight policy stance after gaining confidence that inflation will return to the desired rate of 2%. However, policymakers expect price pressures to remain at their current levels for the entire year and return to the bank’s target next year.
- Financial markets expect the ECB to deliver two more rate cuts this year. Meanwhile, investors’ sentiment in the Eurozone’s largest economy, Germany, has deteriorated due to weak demand from both domestic and overseas markets.
- On Tuesday, a sharp decline in the German ZEW Survey – Economic Sentiment for July raised concerns over the economic outlook. The sentiment data, a key measure of the sentiment of institutional investors towards economic growth, declined at a robust pace to 41.8 from the consensus of 42.5 and May’s reading of 47.5.
Technical Analysis: EUR/USD jumps to four-month high near 1.0950
EUR/USD edges higher to near 1.0950. The major currency pair strengthens after a breakout of a Symmetrical Triangle formation on a daily timeframe. A breakout of the above-mentioned chart pattern results in wider ticks and heavy volume. The shared currency pair is expected to extend its upside towards the March 8 high near 1.0980.
The major currency pair’s near-term outlook is bullish as the 20-day Exponential Moving Average (EMA) near 1.0816 is sloping higher.
The 14-day Relative Strength Index (RSI) shifts into the bullish range of 60.00-80.00, suggesting a strong upside momentum.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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