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- Euro loses strength as Eurozone data cast doubt on ECB hawkishness
Euro loses strength as Eurozone data cast doubt on ECB hawkishness
- The Euro remains limited right above 1.0900 against the US Dollar after Friday’s rejection at 1.1010.
- The weak German Business climate data confirms the region’s grim economic outlook.
- Investors are growing skeptical about the ECB’s ability to maintain its restrictive policy for too long.
The Euro (EUR) stages a mild recovery on Monday, favoured by a weaker US Dollar and a moderate risk-on sentiment. The pair, however, remains unable to stage a significant rebound after Friday’s reversal and remains at a short distance to the 1.0880 support area.
Eurozone data released on Monday showed that German business confidence deteriorated in December, following two consecutive improvements. The IFO Business Climate Index dropped unexpectedly in December, with the sentiment about the current economic situation and the near-term expectations posting lower levels than in the previous month.
These figures come after the downbeat PMI figures seen late last week and the contracting Gross Domestic Product (GDP) seen earlier this month, confirming the view of an upcoming economic slowdown.
This scenario poses a serious challenge for the European Central Bank (ECB) and disputes the hawkish stance ECB President Christine Lagarde defended on Thursday, following the bank’s monetary policy decision.
Daily digest market movers: Euro recovery attempts falter as Eurozone data disappoints
- The Euro remains capped below 1.0930 after Friday’s reversal at 1.1010, as weak Eurozone data challenges the ECB’s hawkish stance.
- German IFO sentiment Climate Index dropped to 86.4 in December from the downwardly revised 87.2 in November against market expectations of an improvement to 87.8.
- The Current Conditions Index dropped to 88.5 from 89.4. The market consensus anticipated an uptick to 89.5.
- The index gauging German firm’s expectations deteriorated to a reading of 84.3 from 85.1. Investors expected an increase to 85.8.
- On Friday, Eurozone Services and Manufacturing PMIs contracted beyond expectations, suggesting a poor contribution from these two sectors to the region’s GDP growth.
- Earlier this month, the Q3 GDP confirmed that Eurozone economy contracted in the third quarter, with inflation levels cooling faster than expected.
- In light of these figures, the ECB’s “higher for longer” stance is losing credibility in investors’ views and is keeping Euro buyers subdued.
Technical Analysis: Euro corrects lower from 1.1010 resistance area
The Euro was rejected again at the 1.1010 resistance area, and the pair remains unable to put a significant distance from the 1.0900-1.0880 support area despite Monday’s moderate risk-on markets.
The broader trend remains positive, although the pair seems to be losing momentum, with the lack of upside momentum suggesting that further correction is on the cards.
On the downside, a break of the December 14 low at 1.0880 and the 4-hour 100 Simple Moving Average (SMA) at 1.0870 is likely to increase bearish pressure towards 1.0825 on the way to 1.0730 lows.
On the upside, the Euro should extend beyond intra-day highs at 1.0930 to attempt a retest of the mentioned 1.1010 resistance. Above here, the next targets would be the August high at 1.1060 and the July 24 and 27 high at 1.1150.
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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