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- Euro remains strong, favoured by US Dollar weakness with ECB decision on tap
Euro remains strong, favoured by US Dollar weakness with ECB decision on tap
- The Euro consolidates at 1.0900 area ahead of the ECB decision.
- The Dollar remains on the defensive after the Fed’s dovish pivot.
- Investors will be looking for dovish hints by the ECB, which would hurt the pair.
The Euro (EUR) maintains a positive tone on Thursday, consolidating gains around the 1.0900 area, boosted by US Dollar’s (USD) weakness after the Federal Reserve (Fed) signaled the end of rate hikes on Wednesday.
The Fed surprised investors with an unexpectedly dovish tone. The bank kept interest rates unchanged, as expected, but Fed Chair Jerome Powell suggested that interest rates have peaked with 17 of the 19 policymakers projecting rate cuts in 2024.
Risk appetite surged after the decision and the US Dollar was sold across the board. The Euro rallied more than 100 pips higher to fresh two-week highs right above 1.0900, where the pair has steadied ahead of the European Central Bank’s (ECB) decision due later on Thursday.
The ECB is expected to leave its main refinancing operations rate on hold at 4.5% and keep a hawkish stance, leaving the door open for further rate hikes if inflation pressures remain high. Investors, however, will be looking for dovish hints as the weaker economic outlook and declining inflation are posing a challenge for ECB hawks.
Daily digest market movers: The ECB might limit Euro rally
- The Euro maintains its bullish tone, with the US Dollar weighed by a dovish Fed.
- US Treasury yields plunged. The benchmark 10-year yield has dropped below 4.0% for the first time since July, adding negative pressure on the US Dollar.
- The Federal Reserve flagged the end of rate hikes, and interest rate projections foresee 75 basis points in cuts next year.
- Futures markets are now pricing a 75% chance of a rate cut in March from about 40% before the Fed decision.
- The ECB is expected to leave its key rate unchanged at 4.5%, leaving options open for further hikes.
- The market will be looking for signals of a pivot that might send the Euro lower.
Technical Analysis: Euro consolidates around 1.0900 ahead of ECB
EUR/USD maintains a near-term bullish tone after Wednesday’s sharp rally as the US Dollar licks its wounds. The US Dollar Index (DXY) seems unable to put a significant distance from the 102.50 support area.
A look at the 4-hour charts shows the pair standing comfortably above the main SMAs, with oscillators at overbought levels, and a resistance area at 1.0915 holding bulls ahead of the outcome of the ECB’s meeting.
If the bank manages to convince investors that rate cuts are off the table, we might see a further rally towards 1.0960, which closes the path to November’s peak at 1.1010.
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.
ECB FAQs
What is the ECB and how does it influence 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 for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
What is Quantitative Easing (QE) and how does it affect the Euro?
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
What is Quantitative tightening (QT) and how does it affect the Euro?
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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