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- Euro tests four-month highs ahead of US PCE inflation data
Euro tests four-month highs ahead of US PCE inflation data
- The Euro appreciated further on US Dollar weakness to test resistance at 1.1010.
- The US Dollar dropped again on Thursday, hammered by downbeat US data.
- The focus shifts towards the US PCE Price Index for more cues on the Fed’s policy outlook.
The Euro (EUR) resumed its broader uptrend on Thursday and returned to the 1.1010 resistance area on Friday, buoyed by the weakness of the US Dollar. A set of downbeat US data reaffirmed investors’ expectations that the US Federal Reserve (Fed) will start easing its monetary policy in early 2024.
Data released on Thursday showed that the United States economy grew at a slower pace than previously estimated in the third quarter. These figures came accompanied by weaker manufacturing data and signs of easing inflation, which are consistent with the theory of a soft landing ahead.
The market has been celebrating the end of the tightening cycle this week and awaiting November’s Personal Consumption Expenditure (PCE) Price Index data to confirm the timing of the kick-off for the easing cycle. The Fed’s favourite inflation gauge is expected to show further deceleration on price pressures which, if confirmed, might increase US Dollar’s weakness.
Daily digest market movers: Euro is pushing higher ahead of US PCE Inflation
- The Euro is tight below four-month highs, awaiting the release of US PCE Price Index data.
- Later today, the US PCE Prices Index is expected to have remained flat in November on month, with the yearly rate declining below the 3% level for the first time in almost three years.
- The Core PCE Prices Index, which removes the impact of seasonal products like food and energy, is seen growing steadily at 0.2% and down to 3.3% from 3.5% in the year.
- On Thursday, US Q3 GDP was revised to a 4.9% annualized growth from the previous 5.2% estimate.
- The Philadelphia Fed Manufacturing index dropped to -10.5 in December from -5.9 in November; the market expected a moderate improvement to -3.
- US Personal Consumption Expenditures eased to 2.6% in Q3, the consensus anticipated a 2.8% reading, unchanged from Q2.
- US Jobless claims increased by 205K from 203K in the previous week, well below the 215K expected. However, this data was offset by the downbeat GDP and manufacturing figures.
- Investors are pricing a nearly 75% chance of a quarter-point rate cut in March and 250 bps cuts in 2024, according to the CME Group Fed Watch Tool.
Technical Analysis: Euro pushes against 1.1010 resistance
The Euro stretched higher on Thursday, favoured by further USD weakness after weak US data. The pair is under increasing bullish pressure on Friday’s European session, with bulls pushing against the November and December swing high at 1.1010, awaiting the release of the US PCE Price Index.
The broader trend remains bullish, with the mentioned 1.1010 closing the path towards the early August high at 1.1060, and the July 24 and 27 peak, at 1.1150.
To the downside, support levels are 1.0930 ahead of a key support area above the 4-hour 100 Simple Moving Average (SMA) at 1.0870. Below here, bearish pressure might increase, with the early December lows at 1.0730 coming into play.
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.
Economic Indicator
United States Core Personal Consumption Expenditures - Price Index (YoY)
The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures." Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.
Read more.Next release: 12/22/2023 13:30:00 GMT
Frequency: Monthly
Source: US Bureau of Economic Analysis
Why it matters to traders
After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.
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