Euro challenges recent peaks in the 1.0630 region, looks at FOMC Minutes

The Euro now accelerates its gains against the US Dollar.
Stocks in Europe trade mostly with gains midwek.
EUR/USD flirts with recent tops near 1.0630.
The USD Index (DXY) trades close to monthly lows around 105.70.
Final CPI in Germany rose 4.5% YoY, 0.3% MoM in September.
The FOMC Minutes take centre stage later in the session.

On Wednesday, the Euro (EUR) manages to pick up further upside traction against the US Dollar (USD), resulting in EUR/USD trading near the area of two-week peaks around 1.0630. The USD Index (DXY) indicates that the Greenback remains in a precarious position below the 106.00 mark due to improved market sentiment, while investors are still processing the recent cautious statements made by Federal Reserve (Fed) officials.

In terms of monetary policy, investors presently expect the Fed to keep interest rates at their current levels for the rest of the year. Market participants are also speculating on the prospect of the European Central Bank (ECB) pausing policy changes, despite inflation levels above the bank's objective and rising fears about the risk of a future recession or stagflation in the European area.

On the domestic calendar, final inflation figures in Germany saw the CPI rise at an annualized 4.5% in the year to September and 0.3% compared with the previous month.

Data-wise in the US, the usual weekly Mortgage Applications tracked by MBA expanded 0.6% in the week to Ocotober 6, while September’s Producer Prices rose more than expected by 0.5% MoM and 2.2% from a year earlier. Later in the NA session, the focus of attention will be on the publication of the FOMC Minutes of the September event, when the Fed kept its interest rates unchanged.

Daily digest market movers: Euro now looks bid prior to FOMC Minutes

The EUR climbs to multi-session tops against the USD.
US and German yields accelerate the downward bias on Wednesday.
Markets expect the Fed will keep interest rates on hold in the coming months.
Investors suggest the ECB will extend the pause of its rate hike campaign.
ECB's Klaas Knot said the bank is ready to act in case disinflation stalls.
ECB's de Cos favoured a gradual and predictable quantitative tightening (QT).
Germany's Economy Ministry sees the economy contracting 0.4% this year.
Geopolitical concerns remain on the rise around the Middle East.

Technical Analysis: Euro now shifts its attention to 1.0770

EUR/USD appears poised to consolidate the recent breakthrough of the pivotal barrier at 1.0600.

Continued upward momentum could potentially propel EUR/USD to revisit the September 20 high of 1.0736, followed by the significant 200-day Simple Moving Average (SMA) at 1.0823. If the pair manages to break above this level, there is potential for testing the August 30 peak at 1.0945 and approaching the psychological threshold of 1.1000. Further breakthroughs beyond the August 10 peak of 1.1064 may lead the pair to the July 27 top at 1.1149 and potentially reach the 2023 peak of 1.1275 from July 18.

Conversely, if selling pressure resumes, there is a possibility of retesting the 2023 low at 1.0448 from October 3 and potentially challenging the significant psychological level of 1.0400. Should this level be breached, it could pave the way for a retest of the weekly lows at 1.0290 (November 30, 2022) and 1.0222 (November 21, 2022).

As long as the EUR/USD remains below the 200-day SMA, the potential for sustained downward pressure persists.

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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