Euro returns to the sub-1.0600 zone on USD recovery

The Euro comes under marked downside pressure against the US Dollar.
European stocks cling to daily gains across the board on Tuesday.
The US Consumer Confidence came in above estimates in October.

The Euro (EUR) gives away the initial strength against the US Dollar (USD), forcing EUR/USD to give away the earlier advance to five-day highs in the proximity of 1.0675 and shift its focus to the 1.0600 support once again.

On the other side of the equation, the Greenback manages to regain composure following a brief dip to the sub-106.00 zone when measured by the USD Index (DXY). The change of direction in the Greenback comes in tandem with some recovery in US yields across different timeframes, particularly in respone to the better-than-expected Consumer Confidence figures.

In the context of monetary policy, there is a growing agreement among market participants that the Federal Reserve (Fed) is likely to maintain its current position of keeping interest rates unchanged at Wednesday's meeting. Nonetheless, there is a possibility of a rate adjustment in December, which appears to be supported by the continued strength of the US economy and still-high inflation levels.

In the domestic calendar, Retail Sales in Germany contracted 4.3% in the year to September. In the broader Eurozone, advanced Inflation Rate for October saw the CPI rising 2.9% YoY, while flash Q3 Gross Domestic Product (GDP) Growth Rate expect the economy to contract 0.1% QoQ and expand 0.1% YoY.

In the US data space, the Employment Cost - Benefits expanded 0.9% QoQ in Q3 and Employment Cost - Wages rose 1.2% QoQ. In addition, the FHFA House Price Index increased by 0.6% MoM in August and the key Consumer Confidence measured by the Conference Board surpassed expectations at 102.6 for the current month.

Daily digest market movers: Euro's upside remains capped by 1.0700

The EUR trades with marked losses against the USD.
US and German yields trade mostly on the defensive.
The Fed could still hike rates by 25 bps in December.
The ECB is expected to maintain its monetary policy impasse until H2 2024.
Geopolitical concerns in the Middle East remain unabated.
The BoJ tweaked its YCC programme at its meeting earlier on Tuesday.
Chinese PMIs surprised to the downside in October.
There is rising market chatter suggesting further stimulus by the PBoC.

Technical Analysis: Euro could still challenge 1.0500

Next on the upside for EUR/USD comes the interim 55-day Simple Moving Average (SMA) at 1.0669 prior to the October peak of 1.0694 (October 24). The breakout of this level exposes the weekly top of 1.0767 (September 12) ahead of the crucial 200-day SMA at 1.0809, while another weekly high of 1.0945 (August 30) comes before the psychological barrier of 1.1000. Beyond this region, the pair may encounter resistance at the August peak of 1.1064 (August 10), ahead of the weekly top of 1.1149 (July 27) and the 2023 high of 1.1275 (July 18).

The resumption of the bearish mood could drag the pair to the weekly low of 1.0495 (October 13), ahead of the lowest level in 2023 at 1.0448 (October 15), and the round number of 1.0400.

The pair's outlook is predicted to continue bearish as long as it remains below the crucial 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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