An auspicious start of the week so far sees the Euro (EUR) managing to pick up some upside traction vs. the US Dollar (USD) and motivating EUR/USD to reclaim the area above the key 1.0800 hurdle on Monday, a region coincident with the critical 200-day SMA.
On the other hand, the Greenback gives away part of the recent two-day advance and revisits the 104.00 neighbourhood when measured by the USD Index (DXY) against the backdrop of a tepid recovery in the risk-associated universe and a marginal correction in US yields across the curve.
In the meantime, investors seem to have already digested Chair Jerome Powell’s speech at the Jackson Hole Symposium on Friday, where he left plenty of policy optionality on the table and once again reiterated that further rate hikes should not be ruled out.
Concerning monetary policy, there is presently a revitalized discussion surrounding the commitment of the Federal Reserve to uphold a stricter stance for an extended duration. This increased focus arises from the impressive durability of the US economy, despite a slight easing in the job market and decreased inflation statistics witnessed in recent months.
Simultaneously, inside the European Central Bank (ECB), conflicts among its Council members have surfaced pertaining to the potential extension of rigorous measures beyond the summer period. These differences of opinion are giving rise to a renewed sense of vulnerability, which is negatively impacting the Euro.
On the US calendar, the only scheduled release on Monday will be the Dallas Fed Manufacturing Index.
The selling pressure around EUR/USD appears to have somewhat eased at the beginning of the new trading week, allowing spot some breathing room around the 1.0800 region.
Further decline could motivate EUR/USD to revisit the August low of 1.0765 (August 25) ahead of the May low of 1.0635 (May 31) and the March low of 1.0516 (March 15). The loss of this level could prompt a test of the 2023 low at 1.0481 (January 6) to re-emerge on the horizon.
Occasional bouts of strength, in the meantime, should meet provisional resistance at the 55-day SMA at 1.0965 prior to the psychological 1.1000 barrier and the August high at 1.1064 (August 10). Once the latter is cleared, spot could challenge the weekly top at 1.1149 (July 27). If the pair surpasses this region, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 (July 18). Further up comes the 2022 high at 1.1495 (February 10), which is closely followed by the round level of 1.1500.
Furthermore, sustained losses are likely in EUR/USD once the 200-day SMA (1.0805) is breached in a convincing fashion.
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%).
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.
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.
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.
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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