EUR/USD rises after Eurozone Retail Sales hold up better than forecast

The EUR/USD continues rising after data shows a lower-than-expected decline in Eurozone Retail Sales.
Germany’s trade surplus comes out much higher than expected, signaling increased Euro demand for its exports.
The Euro is the most popular currency amongst global central banks, according to a recent survey.
The EUR/USD price charts show an extension of the short-term uptrend.

The EUR/USD pair is seeing a lift on Wednesday, trading up over two tenths of a percent against the US Dollar (USD) after the release of Eurozone Retail Sales data showed shoppers continued spending fairly liberally in January.

Eurozone Retail Sales fell by a less-sharp 1.0% at the start of the year, according to data from Eurostat, whilst economists had forecast a more dramatic 1.3% fall as shopppers tightened their purse strings. Nevertheless, the fall was still greater than the 0.5% decline witnessed in December.

The data supports the Euro and builds on the marginal gains made earlier in the day after the release of strong German trade data, which showed a greater-than-expected rise in the country’s trade surplus.

Germany’s Trade Balance rose to €27.8 billion in January, beating estimates of €21.5 billion and the previous surplus of €23.3 billion, according to data from Statistisches Bundesamt Deutschland (SBD).

The release suggests more demand for Euros from foreign importers of German goods. It follows strong Eurozone PMI data released on Tuesday, and contrasts with lackluster US factory and PMI data, which has taken the wind out of the Dollar’s sails.

Euro gains appeal

The Euro is the most popular currency among global central banks, the big fish players in the currency markets, according to a recent survey by a London-based think tank.

Roughly 15 central banks anticipate increasing their reserves of Euros in 2024-25, according to a survey of 75 major central bank reserve managers by the think tank OMFIF.

“Net demand was higher than for any other currency during the period and a jump from the 2021 and 2022 surveys of reserve managers controlling nearly $5 trillion,” said a report by Reuters, citing the survey.

The resurfacing of Eurozone bond yields into positive territory after years of negative rates, as well as a relatively more robust outlook going forward – despite expectations of interest rate cuts – was the reason given by central bankers for their pursuit of the Euro.

On the Horizon

Federal Reserve (Fed) Chairman Jerome Powell has started giving testimony to Congress today. His comments could impact the outlook for Fed policy and impact expectations of a summer interest rate cut. If Powell signals a greater chance of interest rates being cut in June or before it could have a negative impact on the USD (positive for the EUR/USD pair).

The European Central Bank (ECB) policy meeting on Thursday is a major event for the pair. Analysts are looking for a shift in communication: so far the ECB has kept schtum about when it anticipates cutting rates, in contrast with less reserved peers. However, some analysts are saying March could be the time it throws caution to the wind.

Euro Technical Analysis: Short-term uptrend continues

The EUR/USD pair continues its half-hearted recovery from the February lows. The longer-term trend is sideways and difficult to forecast – short-term, however, the peaks and troughs are rising, suggesting a tentative uptrend is in progress and slightly favoring bulls.

Euro vs US Dollar: 4-hour chart

The pair is currently encountering resistance from the 50-day Simple Moving Average (SMA) at 1.0859 but seems to be slowly penetrating it and establishing a foothold above.

Euro vs US Dollar: 1-day chart

The next key hurdle is the 1.0888 February high. If it can break above that level it will continue the short-term uptrend. After that the next target is the 50% Fibonacci retracement of the early 2024 decline, at 1.0918, followed by the 61.8% retracement at 1.0972.

A break beneath the 1.0795 lows would spoil the buyer’s party and indicate a vulnerability to break down.

ECB FAQs

What is the ECB and how does it influence 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 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.

What is Quantitative Easing (QE) and how does it affect the Euro?

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.

What is Quantitative tightening (QT) and how does it affect the Euro?

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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