Euro maintains the constructive stance near 1.1060 ahead of Fed decision
|- Euro sees the daily upside capped near 1.1090 against the US Dollar.
- Stocks in Europe navigate a "sea of red" on Wednesday.
- EUR/USD could pierce 1.1000 on a hawkish Fed.
- Consumer Confidence in France held steady at 85 in July.
- The FOMC event, Powell presser will take centre stage later in the session.
The Euro (EUR) manages to recover some ground against the US Dollar (USD) and prompts EUR/USD to regain the 1.1085/90 band after bottoming out at Tuesday's two-week lows around 1.1020.
The pair gathers steam and leaves behind the recent bearish trend over several sessions, targeting the key 1.1100 barrier in the very near term against the backdrop of the Greenback's renewed selling pressure and mixed performance of yields on both sides of the Atlantic.
The most significant event of the session is the widely anticipated interest-rate hike of 25 basis points (bps) by the Federal Reserve (Fed). However, the subsequent press conference by Chair Jerome Powell became increasingly important amidst growing speculation that the Fed might end its tightening campaign sooner than expected. This speculation appears underpinned by disinflationary pressures in the US and some signs of cooling in the labour market.
Meanwhile, investors are closely watching the European Central Bank (ECB), with expectations of another quarter percentage point rate hike on Thursday. The interest in the potential next steps of the central bank has been on the rise in past weeks.
Regarding the monetary policy approach, the Fed seems to be approaching the end of its rate-hiking cycle, suggesting a possible pause or slowdown in the future. On the other hand, some ECB officials recently expressed less hawkish views on the likelihood of further rate hikes beyond the summer.
In the domestic docket, Consumer Confidence in France remained steady at 85 for the current month.
Across the Atlantic, MBA Mortgage Applications dropped 1.8% in the week to July 21, while New Home Sales contracted 8.0% MoM in June (0.697M units).
Daily digest market movers: Euro prints decent gains ahead of Fed event
- The EUR trades with modest gains vs. the USD ahead of the FOMC gathering.
- The USD Index manages well to keep the trade above the 101.00 zone.
- Investors expect both the Fed and the ECB to raise rates this week.
- US, German yields trade in a mixed note ahead of the Fed gathering.
- Investors' attention is expected to be on Powell's press conference.
Technical Analysis: Euro still risks a deeper pullback
EUR/USD regains strength and looks to retest the 1.1100 neighbourhood on Wednesday.
Further downside, EUR/USD should meet immediate contention at Tuesday's weekly low of 1.1020 ahead of the psychological 1.1000 mark, all seconded by provisional support at the 55-day and 100-day Simple Moving Averages (SMA) at 1.0901 and 1.0895, respectively. The loss of this region could open the door to a potential visit to the July 6 low of 1.0833 ahead of the key 200-day SMA at 1.0706 and the May 31 low of 1.0635. South from here emerges the March 15 low of 1.0516 before the 2023 low of 1.0481 on January 6.
On the upside, the next hurdle appears at the 2023 high at 1.1275 reached on July 18. Once this level is cleared, there are no resistance levels of significance until the 2022 peak of 1.1495 recorded on February 10.
The constructive view of EUR/USD appears unchanged as long as the pair trades above the key 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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