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- Euro loses ground as US Dollar appreciates in risk-averse trading
Euro loses ground as US Dollar appreciates in risk-averse trading
- The Euro extends its reversal as the safe-haven US Dollar appreciates.
- Cooling hopes of interest rate cuts and growing geopolitical risks have crushed investors’ appetite for risk.
- ECB policymakers and German CPI figures push back monetary easing expectations.
The Euro (EUR) is under increasing bearish pressure on Tuesday. The risk-averse sentiment – with investors paring back hopes of rate cuts in 2024 – and the explosive situation in the Middle East, are rushing traders into safe assets and weighing on the common currency.
The hawkish comment from the European Central Bank (ECB) Governor François Villeroy de Galhau, playing down rate cut expectations, has failed to provide any significant support to the Euro.
Villeroy’s observations come after the President of the Bundesbank, Joachim Nagel warned about the mistake of easing monetary policy too early. These comments have forced investors to reassess their expectations of aggressive rate cuts by most major central banks. This is weighing on risk appetite and underpinning support for the US Dollar.
Furthermore, the Houthi militias have extended their targets to UK and US cargo vessels. This forces shipping companies to find alternative routes, boosting transport costs, which will translate into higher inflation. A further challenge for the central banks’ easing plans.
Daily digest market movers: Euro depreciates in risk-off markets
- The Euro is trading lower, weighed by USD strength, although it remains within the last two weeks’ trading range.
- On Tuesday, ECB’s Villeroy affirmed that it is still too early to declare victory on inflation, cooling hopes for imminent rate cuts.
- On Monday, Joachim Nagel, also a member of the ECB Board of Governors, warned about the dangers of cutting rates too early.
- The final estimate of the German Consumer Prices Index (CPI) for December confirmed that prices grew by 3.7% on year. This marks an uptick from the 3.2% increase seen in November and provides further evidence that bringing inflation to 2% will take an additional effort.
- Later today, the US Federal Reserve Bank of New York Empire State Manufacturing Index and the Fed’s Governor Christopher Waller’s comments are likely to increase US Dollar’s volatility.
- The highlight on the US Calendar this week are Wednesday’s Retail Sales figures, which are expected to have increased moderately in December.
- US consumption data will provide context to the speeches of Fed’s policymakers Michael Barr and Michelle Bowman.
- In the Eurozone calendar on Wednesday, Eurostat is expected to confirm that the CPI accelerated to 2.9% year-on-year in December from 2.4% in November, while the Core inflation eased to a 3.4% yearly pace from the previous 3.6% rate.
Technical Analysis: EUR/USD approaches recent range bottom at 1.0875
The EUR/USD has pierced the trendline support from early November lows at 1.0910, and is approaching a key support area at 1.0875, which contained bears in early January and mid-December.
A clear move below here would activate a head and shoulders (H&S) pattern, a common trend-change figure, and increase bearish pressure towards 1.0730. The measured target of the H&S pattern is the 78.6% Fibonacci retracement of the late 2023 rally.
On the upside, the reverse trend line at 1.0910 is likely to offer resistance ahead of the 1.1000 area.
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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