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- Euro trims some losses with the US Dollar recovery losing steam
Euro trims some losses with the US Dollar recovery losing steam
- The Euro picks up as risk aversion eases, although the broader bearish trend remains intact.
- The strong US Retail Sales have contributed to pushing back hopes of imminent Fed rate cuts.
- ECB President Lagarde discarded any aggressive easing on Wednesday, which provided some support to the Euro.
The Euro (EUR) is paring some losses on Thursday’s European session. The US Dollar Index has retreated from one-month highs, as the impact of the strong US Retail Sales data faded, although the broader EUR/USD trend remains negative.
US Retail Sales beat expectations on Wednesday, adding to evidence of the solid US economy and endorsing the recent comments from Federal Reserve (Fed) officials, who said it is too early to cut interest rates.
Somewhat later, European Central Bank (ECB) President Christine Lagarde spoke at the Davos summit to discard any aggressive rate cuts and push the bank’s dovish pivot to the next summer. This has provided some support to the Euro.
Later today, a speech by the Atlanta Fed President, Raphael Bostic, the US weekly Jobless claims and housing data are likely to give some guidance to the US Dollar. After that, ECB’s Lagarde is expected to take the stage in Davos again.
Daily digest market movers: Euro posts moderate recovery as USD takes a breather
- The Euro is nudging higher, supported by easing risk aversion, although the broader trend remains bearish.
- US Retail sales increased 0.6% in December, above November’s 0.3% increase and beating expectations of a 0.4% increase.
- These figures confirm the solid US economic momentum and suggest that the Fed has still some work to do to bring inflation down to target.
- The Fed Beige book underscored the solid US economic momentum, reflecting strong consumption levels in Christmas, increased traveling, and higher credit card lending.
- The market keeps paring back hopes of Fed cuts in March. The CME Group Fed Watch Tool shows a 63% chance that the US central bank will start easing in March, from levels above 70% earlier this week.
- Geopolitical tensions continue escalating. News that Pakistan has attacked Iran in retaliation for Tehran’s offensive earlier this week is likely to curb investors’ appetite for risk and limit the Euro’s recovery.
Technical Analysis: EUR/USD likely to meet resistance at 1.0930
The EUR/USD pair is going through a moderate recovery, after having found support at 1.0845 lows on Wednesday. A somewhat xxxx after US Dollar is contributing to the common currency’s rebound, although the broader trend remains negative.
Euro bulls are likely to meet a significant resistance at the 1.0930 area, where a previous trendline resistance and the confluence of the 4-hour 200 and 50 SMAs will challenge bulls.
The pair would need to confirm above that level to ease negative pressure and set its focus back to the previous lower high, at 1.1000.
On the contrary, a reversal at current levels would give fresh hopes for bears to breach Wednesday’s low at 1.8040, confirming below the neckline of a bearish Head and Shoulders (H&S) pattern.
The next targets, in this case, would be 1.0800 and 1.0725. The H&S measured target is the 78.6% Fibonacci retracement of the aforementioned rally at 1.0600.
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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