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- Euro drops to multi-week lows and approaches 1.0750, looks at ECB
Euro drops to multi-week lows and approaches 1.0750, looks at ECB
- The Euro resumes its decline vs. the US Dollar.
- Stocks in Europe open Tuesday’s session in the red.
- EUR/USD challenges the 1.0750 region, or multi-week lows.
- The USD Index (DXY) advanced to three-month tops.
- US markets return to their usual activity following Monday’s holiday.
- The final Services PMIs are due in the euro area.
- The ECB will release its Consumer Expectation Survey.
- The ECB’s Schnabel, De Guindos, Fernandez-Bollo are due to speak.
The Euro (EUR) loses further ground vs. the US Dollar (USD) and drags EUR/USD to print new multi-week lows near the 1.0750 level on turnaround Tuesday. The resurgence of selling pressure around the pair appears underpinned by lower prints from the Services sector in China, as per PMI results published by Caixin earlier in the Asian trading hours.
The investors’ bias towards the safe-have universe lends support to the Greenback early in the European morning and lifts the USD Index (DXY) to new highs around 104.50 amidst the still unclear direction in US and German yields.
Meanwhile, there remains strong confidence in the market regarding the Federal Reserve's decision to halt its campaign of interest rate hikes for the remainder of the year. In addition, speculation has begun to emerge, suggesting that interest rate cuts may not materialize until March 2024.
On the other hand, the European Central Bank (ECB) finds itself navigating a climate of heightened uncertainty surrounding the potential course of interest rates beyond the summer months. Market discussions revolve around the concept of stagflation, further contributing to the prevailing sense of ambiguity.
In the domestic calendar, the release of the final Services PMI for the month of August is followed by the publication of the ECB’s Consumer Expectations Survey and speeches by Board members Eduardo Fernandez-Bollo, Isabel Schnabel, and Luis De Guindos.
Daily digest market movers: Euro suffers another bout of weak Chinese prints
- The EUR faces extra headwinds vs. the USD on Tuesday.
- Chinese Caixin Services/Composite PMIs weakened in August.
- The Services sector will take centre stage in the euro docket.
- Disinflation and cracks in the US labour market support the Fed’s impasse.
- Investors see the Fed potentially cutting rates in Q2 2024.
- The RBA left the OCR unchanged at 4.10%, as expected.
Technical Analysis: Euro risks a drop to 1.0635
EUR/USD remains well under pressure and the recent breach of the key 200-day SMA (1.0819) seems to prop up the likelihood of extra losses in the short-term horizon.
If EUR/USD accelerates its losses, it could revisit the May low of 1.0635 (May 31) prior to the March low of 1.0516 (March 15). The loss of the latter could prompt a potential test of the 2023 low at 1.0481 (January 6) to emerge on the horizon.
On the upside, spot is now expected to target the critical 200-day SMA at 1.0819. North from here, bulls should meet the the weekly top of 1.0945 (August 30) ahead of the interim 55-day SMA at 1.0958 and prior to the psychological 1.1000 barrier and the August top at 1.1064 (August 10). Once the latter is cleared, spot could challenge the weekly peak 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 is breached in a convincing fashion.
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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