EUR/USD Forecast: Euro could find it hard to gather recovery momentum

EUR/USD recovers modestly in the European session on Monday.
Financial markets in the US will remain closed in observance of the Labor Day holiday.
The near-term technical outlook is yet to point to a bullish tilt.

EUR/USD spent the second half of the previous week under strong bearish pressure and closed deep in negative territory in three consecutive days. After losing over 1% on a weekly basis, the pair stages a technical correction and trades above 1.1050 in the European morning on Monday.

The US Dollar (USD) preserved its strength ahead of the weekend as markets paid little to no attention to the Personal Consumption Expenditures (PCE) Price Index figures for July.

The US Bureau of Economic Analysis reported that the annual PCE inflation held steady at 2.5%. Meanwhile, the core PCE Price Index, which excludes volatile food and energy prices, rose 0.2% on a monthly basis, as expected.

Bond and stock markets in the US will remain closed in observance of the Labor Day holiday on Monday. Hence, the trading action is likely to turn subdued in the second half of the day.

The US economic docket will feature ISM Manufacturing PMI for August on Tuesday. Later in the week, investors will have more data releases to assess from the US, including ISM Services PMI and August jobs report.

EUR/USD Technical Analysis

EUR/USD started to edge higher after coming in within a touching distance of 1.1040, where the Fibonacci 38.2% retracement of the latest uptrend is located. At the time of press, the pair was trading a few pips above the 100-period Simple Moving Average (SMA) on the four-hour chart, currently aligning at around 1.1060. In case the pair confirms this level as support, 1.1100 (Fibonacci 23.6% retracement, static level) could be seen as next resistance before 1.1130 (50-period SMA).

On the downside, a drop below 1.1060 (100-period SMA) could open the door for another test of 1.1040. Once that support fails, technical sellers could show interest. In this scenario, 1.1000 (psychological level, Fibonacci 50% retracement) could be seen as the next bearish target.

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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