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- Euro treads water in the low-1.0900s ahead of Fed’s Powell
Euro treads water in the low-1.0900s ahead of Fed’s Powell
- Euro alternates gains with losses around the 1.0920 region.
- Stocks markets in Europe extend the weekly decline early on Wednesday.
- The cautious trade prevails ahead of key testimony by Powell.
- The risk-off mood continues to weigh on the risk complex.
- Further recovery remains in place for the greenback.
As the markets opened in Europe on Wednesday, the EUR struggled to make gains, causing the EUR/USD pair to remain around the low-1.0900s. This lack of direction could be attributed to investors' caution ahead of Chief J. Powell's semiannual testimony before Congress later in the day.
Market participants anticipate a hawkish message from Powell during this key event. It's worth noting that at the June FOMC event, rate setters indicated a possibility of resuming the tightening campaign in July, with projections pointing towards two more 25 bps rate hikes or a 50 bps raise.
While Powell's testimony takes centre stage on Wednesday, the markets are also closely monitoring the likely next decisions on interest rates by both the Federal Reserve and the European Central Bank (ECB).
There are no data releases scheduled in the euro zone on Wednesday, but the usual weekly MBA Mortgage Applications and the API's weekly report on US crude oil stockpiles are due across the Atlantic.
Daily digest market movers: Euro looks at Powell for near-term direction
- Pre-Powell cautiousness continues to favour the US Dollar.
- Powell’s testimony is expected to fall on the hawkish side.
- Sticky UK inflation prompts extra tightening by the BoE in H2 2023.
- China, recession concerns maintain the risk appetite subdued so far.
- The FX universe continues to monitor the ECB-Fed divergence.
Technical Analysis: There is still room for a move to 1.1000
EUR/USD seems to have met some decent contention around the 1.0900 neighbourhood so far this week. In order to continue its upward momentum, the EUR must quickly surpass the monthly high at 1.0970 (June 16) to potentially allow for a test of the psychological barrier of 1.1000. Further resistance levels include the 2023 high of 1.1095 (April 26), the round level of 1.1100, and the weekly high of 1.1184 (March 31, 2022), which is supported by the 200-week SMA, currently at 1.1181.
In the event that the bears take control, there is an interim contention at the 55-day SMA at 1.0880. Should this level be breached, there are no significant support levels until the May low of 1.0635 (May 31), followed by the March low of 1.0516 (March 15) and the 2023 low of 1.0481 (January 6).
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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