- Rising bets for a rate cut by the Fed in September weighed on the US Dollar.
- Powell paved the way for an interest rate cut in September.
- EUR/USD reached a new 2024 high near 1.1200 and retargets 1.1275.
Another solid weekly performance saw EUR/USD clinch its fourth consecutive week of gains, including a new 2024 peak in the 1.1180–1.1185 band. The strong move higher in the pair came in response to the heightened downward bias hitting the US Dollar (USD).
Powell cemented the case for a rate cut next month
It was a positive week for EUR/USD all along, as market participants continued to punish the Greenback on the basis that the Federal Reserve (Fed) might start cutting its interest rates as soon as September.
This view was addressed by some Fed officials, as well as by the FOMC Minutes, earlier in the week, although the final say came from Chair Jerome Powell on Friday. Indeed, in his highly anticipated speech at the Jackson Hole Symposium, Powell signalled that the time for a change in the monetary policy stance has come, adding that he is now more confident that US inflation is heading toward the bank’s goal on a sustainable path.
The issue regarding the potential size of the rate cut seems to be leaning towards a quarter-point reduction, as US recession fears have rapidly fizzled out in response to relatively firm data releases as of late.
The ECB is also expected to reduce rates in September
Despite the ongoing radio silence from the European Central Bank (ECB), investors continue to pencil in two more interest rate cuts by the central bank for the remainder of the year, most likely in September and December, which should take the deposit facility rate to 3.25% by year-end.
The logic behind further easing by the ECB can be found in the worsening conditions of economic and business activity in Germany and the whole euro bloc. While a recession on the old continent may be overstated, the probability of a period of slowdown in economic activity appears more suitable.
It can’t be said the same of inflation in the region, which remains stubbornly elevated, particularly regarding services. However, according to the ECB’s latest survey, wage growth in the Eurozone slowed last quarter, strengthening the argument for another interest rate cut in the next few months and easing policymakers' concerns that rising labour costs would keep driving inflation higher.
Furthermore, growth in negotiated wages decelerated to 3.55% in the second quarter, down from 4.74% in the previous three months, largely due to a significant slowdown in Germany, the bloc's largest economy.
All in all, while the Fed-ECB policy divergence appears to dwindle in the next few months, the focus of attention is expected to be on the real economy, where the US has an advantage over its European peer, thus keeping the downside of the Greenback somewhat contained in the long run.
What’s next for the EUR/USD?
Moving forward, Germany is expected to take centre stage next week, with the releases of the IFO’s Business Climate (August 26), final Q2 GDP Growth Rate (August 27), GfK’s Consumer Confidence (August 28), the advanced Inflation Rate for the current month (August 29), Retail Sales, and the labour market report (August 30). In addition, the preliminary Inflation Rate in the broader euro area is also expected on August 30.
EUR/USD technical outlook
From a technical perspective, EUR/USD is positioned to continue its uptrend. On the weekly chart, spot left behind the key 200-week SMA at 1.1063, which bodes well for the continuation of the ongoing bullish trend for the time being.
On the daily chart, technical indicators remain in the overbought region, while the momentum indicates that the current upside bias remains strong. Both the provisional 55-day and 100-day SMAs continue to point northward at 1.0857 and 1.0820, respectively. Spot, in the meantime, maintains its business above the critical 200-day SMA at 1.0847, therefore, keeping the short-term constructive bias well in place. Further advances, in the meantime, are likely, with the YTD peak at 1.1194 (August 23) emerging as the immediate upside barrier. A move beyond this level could lead to an advance towards the 1.1200 milestone, ahead of the 2023 peak of 1.1275 (July 18).
In the event of a pullback, immediate support lies at 1.0881 (weekly low from August 8), followed by the 200-day SMA and the August bottom of 1.0777 (August 1).
Economic Indicator
Consumer Price Index (YoY)
The Consumer Price Index (CPI), released by the German statistics office Destatis on a monthly basis, measures the average price change for all goods and services purchased by households for consumption purposes. The CPI is the main indicator to measure inflation and changes in purchasing trends. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is bullish for the Euro (EUR), while a low reading is bearish.
Read more.Last release: Fri Aug 09, 2024 06:00
Frequency: Monthly
Actual: 2.3%
Consensus: 2.3%
Previous: 2.3%
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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