EUR/USD declines further below 1.1050 as US Dollar rises
|- EUR/USD drops below 1.1050 as the US Dollar performs strongly ahead of the ISM US Manufacturing PMI release for August.
- The Fed and the ECB are expected to cut interest rates this month.
- This week, investors will focus on the US NFP data for August.
EUR/USD falls back after failing to extend recovery above the immediate resistance of 1.1080 in Tuesday’s North American session. The major currency pair drops as the US Dollar (USD) clings to gains to near an almost two-week high as the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to 101.80.
The US Dollar exhibits strength as investors focus on the United States (US) Nonfarm Payrolls (NFP) data for August, which will be published on Friday. Investors will keenly focus on the labor market data to get cues about the likely interest rate cut size by the Federal Reserve (Fed) in the September monetary policy. Market participants remain confident that the US central bank will pivot to policy normalization this month.
According to the CME FedWatch tool, the likelihood of a 50-basis points (bps) interest rate reduction in September is 31%, while the rest favors a 25-bps decline to 5.00%-5.25%. The probability of a large rate cut size has declined from 36% a week earlier, particularly after the revised Q2 Gross Domestic Product (GDP) estimate indicated that the US economy grew at a faster rate of 3% from the preliminary assumption of 2.8%.
In Tuesday’s session, investors will focus on the US S&P Global and ISM Manufacturing Purchasing Managers’ Index (PMI) data for August, which will be published at 13:45 and 14:00 GMT, respectively. The S&P Global PMI, which is a final estimate, is expected at 48.0, similar to the flash estimate.
Meanwhile, the ISM report is expected to show that activities in the manufacturing sector contracted at a slower pace, with the PMI coming in at 47.5 from the prior release of 46.8.
Daily digest market movers: EUR/USD drops as ECB Villeroy acknowledges need for rate cuts
- EUR/USD drops below 1.1050 in European trading hours. The major currency pair faces severe pressure as the Euro is on the back foot on firm speculation that the European Central Bank (ECB) will cut interest rates this month. This would be the second interest rate cut by the ECB as it pivoted to policy normalization in June, with policymakers remaining confident that price pressures will return to the bank’s target of 2% in 2025.
- Market speculation for ECB interest rate cuts in September has strengthened as Eurozone price pressures have decelerated significantly and signs of a potential recession in Germany have swelled. Eurozone’s headline inflation declined to 2.2% in August due to a sharp decline in energy prices.
- The German economy contracted in the second quarter and is expected to go through a rough phase due to weak demand from domestic and overseas markets.
- Meanwhile, ECB policymakers are also comfortable with market expectations of September rate cuts. Bank of France Governor Francois Villeroy de Galhau said in French magazine Le Point on Friday that “it would be fair and wise to decide in favor of a new rate cut." Villeroy added: "Unfortunately, our growth remains too weak,” and that “the balance of risks still needs to be monitored in Europe,” Reuters reports.
Technical Analysis: EUR/USD hovers near 20-day EMA
EUR/USD trades inside Monday’s trading range after steading below the crucial resistance of 1.1100. The near-term outlook of the major currency pair is still firm as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher.
Earlier, the major currency pair strengthened after breaking above the Rising Channel formation on a daily timeframe.
The 14-day Relative Strength Index (RSI) has declined below 60.00 after turning overbought near 75.00.
On the upside, a recent high of 1.1200 and the July 2023 high at 1.1275 will be the next stop for the Euro bulls. Meanwhile, the downside is expected to remain cushioned near the psychological support of 1.1000.
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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