Euro advances further on improved risk appetite

The Euro regains the smile against the US Dollar.
European stocks kick off the week with decent gains.
Germany’s advanced inflation figures drop more than expected.

The Euro (EUR) leaves behind the initial pessimism against the US Dollar (USD), encouraging EUR/USD to climb to multi-day highs and trespass the key barrier at 1.0600 the figure at the beginning of the week. The better tone in the European currency comes in response to unexpected auspicious results from advanced GDP figures in Germany for the July-September period, while the broad-based risk-on sentiment also underpins the upside momentum in spot.

In the interim, the Greenback comes under some downside pressure and relaxes to the 106.20-106.15 band when gauged by the USD Index (DXY). The loss of momentum of the index comes in contrast to a languid climb in US yields across diverse timeframes.

Within the realm of monetary policy, a growing consensus has materialized amongst market participants that the Federal Reserve (Fed) will preserve its present stance of retaining interest rates unchanged at the upcoming meeting on November 1. The potential remains, however, for a potential shift in rates in December, a view that seems well reinforced by the resilience of the US economy and still elevated inflation levels.

Regarding the European Central Bank (ECB), no surprises arose at its event on October 26 following a unanimous decision to keep its interest rates unchanged. President Christine Lagarde reiterated once more that work remains to be done to bring inflation back to target, while it is anticipated that inflation will remain too elevated for too long. Adding a bearish undertone to the meeting, Lagarde acknowledged that risks to the economic outlook appear skewed to the downside.

From the speculative community’s viewpoint, net longs in the single currency increased to four-week highs in the week ended on October 24, according to the CFTC report. The period coincides with some consolidation in the pair against the backdrop of persistent resilience of the US economy and rising cautiousness prior to the ECB event.

Busy day in the euro calendar, as Germany’s advanced figures for the Q3 GDP Growth Rate showed the economy is expected to contract 0.1% QoQ and 0.3% YoY, while preliminary Inflation Rate for the month of October saw the CPI rise at an annualized 3.8%. In the broader Eurozone, final Consumer Confidence came in at -17.9, Economic Sentiment receded to 93.3 and Industrial Sentiment worsened to -9.3, all prints for the month of October.

Daily digest market movers: Euro opens the door to extra advances

The EUR attempts a decent comeback vs. the USD.
US and German yields attempt a tepid bounce at the beginning of the week.
There is still scope for the Fed to raise rates in December.
The ECB is seen extending its pause until H2 2024.
ECB's Simkus sees a soft landing of the region's economy.
ECB's Kazimir suggests the ECB must keep its current restrictive stance for many quarters.
The Middle East conflict threatens to extend to other regions.
Investors continue to factor in further FX intervention around USD/JPY.
Retail Sales in Australia expanded more than expected in September.
Preliminary Inflation Rate in Spain came in at 3.5% YoY in October.

Technical Analysis: Euro now sets sails to the 1.0700 region

EUR/USD picks up some upside traction and shifts its focus to the 1.0600 hurdle on Monday.

In case sellers push harder, EUR/USD could revisit 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.

On the upside, the immediate short-term target for the pair emerges at the October high of 1.0694 (October 24), a level that appears reinforced by the proximity of the temporary 55-day Simple Moving Average (SMA) at 1.0673. Further up comes the weekly top of 1.0767 (September 12) before the key 200-day SMA at 1.0810, and another weekly high of 1.0945 (August 30), all ahead of the psychological level of 1.1000. Beyond this zone, the pair might face resistance at the August top at 1.1064 (August 10), prior to the weekly peak of 1.1149 (July 27) and the 2023 high at 1.1275 (July 18).

The pair’s outlook is expected to remain negative while below the critical 200-day SMA.

(This story was corrected on October 30 at 11:03 GMT to say that the USD Index (DXY) lost momentum instead of strengthened)

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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