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- Euro consolidates near highs amid a favourable risk sentiment
Euro consolidates near highs amid a favourable risk sentiment
- The Euro maintains a bid tone with the Dollar vulnerable on Fed-easing hopes.
- Cooling US inflation and weaker economic growth fuel hopes of interest rate cuts in March.
- ECB-Fed divergence is likely to support the pair until Eurozone data is released in the first week of 2024.
The Euro (EUR) maintains its positive tone during Thursday’s European trading session. The pair is contained within a tight range above 1.1100, set for its third consecutive weekly rally, with the Dollar drifting to fresh mid-term lows amid heightened hopes that the Fed will start cutting interest rates in March.
US macroeconomic data released last week confirmed the narrative of cooler inflation and a softening economic growth, the soft-landing theory that will allow the Fed to retrace the monetary tightening path.
In the absence of key fundamental releases this week, today´s US Weekly Jobless Claims and Existing Home Sales, which are expected to have bounced up in November, might provide some support to an ailing US Dollar.
Daily digest market movers: US Dollar dives with investors bracing for Fed cuts in 2024
- The Euro consolidates at five-month highs above 1.1100, with the US Dollar weighed on hopes of Fed rate cuts.
- US PCE Prices Index data released last week showed that inflation is decelerating at a faster-than-expected pace
- The US Gross Domestic Product was revised to a 4.9% growth in the third quarter, down from the 5.2% previously estimated
- The calendar is light this week and investors remain focused on last week’s figures to feed hopes that the Fed will start cutting rates in early 2024.
- Futures markets are pricing nearly 90% chances of Fed cuts in March, and 150 bps cuts in the whole year, according to the CME Group Fed Watch Tool.
- In contrast, the ECB struck a more hawkish tone after its December policy meeting, defending the “higher for longer” view, which is underpinning support for the Euro.
Technical Analysis: Euro consolidates gains above 1.1100
The Euro maintains its bullish bias with price action standing comfortably at five-month highs above 1.1100. The US Dollar weakness, with the Dollar Index trading at its lowest level since late July – and more than 6% below November´s peak – is acting as a tailwind for the Euro.
Technical indicators are positive, although the overbought levels reflected in the four-hour RSIs suggest that consolidation or even a certain retracement might be ahead.
On the upside, immediate resistance lies at the July 27 high, 1.1145, which closes the path toward the 2023 high, at 1.1280. Support levels are at 1.1100 ahead of a previous resistance area, at 1.1010 and 1.0930.
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.
Interest rates FAQs
What are interest rates?
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
How do interest rates impact currencies?
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
How do interest rates influence the price of Gold?
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
What is the Fed Funds rate?
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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