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- Euro bounces off 1.0700 ahead of key US services sector data
Euro bounces off 1.0700 ahead of key US services sector data
- The Euro attempts a tepid rebound against the US Dollar.
- Stocks in Europe opened with broad-based losses.
- EUR/USD appears to have met some contention near 1.0700.
- The USD Index (DXY) shed some ground after recent peaks.
- The US ISM Services PMI will be in the limelight on Wednesday.
- Germany’s Factory Orders plunged 11.7% on month in July.
The Euro (EUR) regains some balance against the US Dollar (USD) on Wednesday, helping EUR/USD to leave behind Tuesday’s multi-week lows in the 1.0700 neighbourhood.
After advancing to fresh six-month tops just below the 105.00 figure in the previous session, the Greenback faces some selling pressure and recedes to the 104.80-104.70 band when tracked by the USD Index (DXY). The small downtick in the index came despite the marked bounce in US yields across different timeframes.
In the meantime, steadfast confidence pervades the market with regards to the Federal Reserve's (Fed) resolution to cease its campaign of raising interest rates for the remainder of the year. At the same time, investors seem to be assuming that any interest rate reductions may not come until March 2024.
Conversely, the European Central Bank (ECB) finds itself traversing a landscape fraught with heightened uncertainty regarding the future trajectory of interest rates beyond the summer season. Market deliberations revolve around the notion of stagflation, amplifying the prevailing air of ambiguity.
In the euro docket, the Construction PMI in Germany improved marginally to 41.5 in August, and Factory Orders contracted markedly by 11.7% in July on month. Later in the session, Retail Sales in the broader euro area are also due.
In the US, the usual weekly Mortgage Applications tracked by MBA are followed by the IBD/TIPP Economic Optimism index, the Balance of Trade, the final S&P Global Services PMI for August, and the always-relevant ISM Services PMI.
Daily digest market movers: Euro meets initial contention near 1.0700
- The EUR attempts a mild recovery against the USD midweek.
- US yields resume the marked march north.
- ECB’s Klaas Knot does not rule out another interest-rate raise.
- Disinflation and cracks in the US labour market support the Fed’s pause.
- Markets continue to price in Fed rate cuts in Q2 2024.
Technical Analysis: Euro risks deeper retracements
EUR/USD has met some initial respite to the ongoing intense retracement around the 1.0700 region. However, the recent breakdown of the critical 200-day Simple Moving Average (SMA) at 1.0820 continues to favour extra losses in the short term.
If EUR/USD accelerates its losses, it could revisit the May 31 low of 1.0635 prior to the March 15 low of 1.0516. The loss of the latter could prompt a potential test of the 2023 low at 1.0481 seen on January 6.
On the upside, spot is expected to target the critical 200-day SMA at 1.0820. North from here, bulls should meet the the weekly top of 1.0945 from August 30 ahead of the interim 55-day SMA at 1.0953 and prior to the psychological 1.1000 barrier and the August 10 top at 1.1064. Once the latter is cleared, spot could challenge July 27 peak at 1.1149. If the pair surpasses this region, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 seen on July 18.
A sustained decline is likely in EUR/USD while it remains below the 200-day SMA.
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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