Euro trims losses and approaches 1.0700 as Dollar deflates
|- The Euro bounces off earlier lows vs. the US Dollar.
- European stocks en route to close Wednesday's session with gains.
- Chair Powell did not mention monetary policy or outlook at his speech.
The Euro (EUR) now regains some balance against the US Dollar (USD), prompting EUR/USD to rebound from earlier lows and approach the key barrier at 1.0700 the figure, as the European session draws to a close on Wednesday.
Meanwhile, the US Dollar gives away part of its earlier advance, motivating the USD Index (DXY) to recede to the 105.60 region amidst renewed weakness in US yields in the belly and the long end of the curve.
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's calendar, the final inflation rate in Germany showed CPI rising 3.8% YoY in October and coming in flat on a monthly basis. In the euro region, Retail Sales contracted 0.3% MoM in September and 2.9% over the last twelve months.
Across the pond, Mortgage Applications measured by MBA rose by 2.5% in the week to November 3, and Wholesale Inventories increased 2.2% in September.
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 shifts its attention to 1.0700 and above
- The EUR bounces off weekly lows vs. the USD.
- US and German yields trade on the defensive so far.
- Markets see the Fed maintaining its monetary policy intact in December.
- An extended pause appears likely by the ECB until H2 2024.
- ECB's Martins Kazaks did not rule out further tightening.
- ECB's Gabriel Makhlouf deemed as premature talks about rate cuts.
- ECB's Pierre Wunsch suggested the economy maybe entering a stagflation phase.
- Geopolitical worries in the Middle East remain well in place.
- Focus is expected to be on Chair Powell’s speech.
Technical Analysis: Euro appears supported around 1.0650
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.
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.
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