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- EUR/USD capitalizes on improved market sentiment, subdued US Dollar
EUR/USD capitalizes on improved market sentiment, subdued US Dollar
- EUR/USD moves higher above 1.0780 as the appeal for risky assets improves.
- The ECB is expected to start reducing interest rates in June.
- Investors keenly await the US inflation data for fresh guidance on the Fed’s interest rates.
EUR/USD rises to 1.0780 in Monday’s European session due to improved market sentiment. The major currency pair holds gains as traders have priced in that interest rate cuts from the European Central Bank (ECB) will be more and start earlier than the Federal Reserve (Fed). Financial markets have anticipated that the ECB will reduce interest rates by 70 basis points (bps) this year and will start lowering them from the June meeting.
On the contrary, the Fed is expected to begin reducing interest rates from September and investors expect the Fed to bring down borrowing rates by 45 bps by the year-end.
This week, the Euro will be guided by Eurozone Q1 preliminary Gross Domestic Product (GDP) data, which will be published on Wednesday. The Eurostat is expected to report that the economy has grown steadily by 0.3% and 0.4% on a quarterly and an annual basis, respectively. The GDP data will provide fresh cues about the Eurozone’s economic outlook. EUR/USD will also be guided by the US Consumer Price Index (CPI) data for April, which is also set to be released on Wednesday.
Daily digest market movers: EUR/USD gains ahead of crucial Eurozone, US economic data
- EUR/USD clings to gains near 1.0780 as the market sentiment is upbeat. S&P 500 futures register nominal gains in the European session as investors shrugged off uncertainty ahead of the United States Consumer Price Index (CPI) data for April, which will be published on Wednesday.
- Economists have forecasted that annual headline inflation declined to 3.4% in April from 3.5% in March. The annual core CPI, which excludes volatile food and energy prices, is estimated to have decelerated to 3.6% from the prior reading of 3.8%. Monthly headline and core inflation are expected to have slowed to 0.3%, compared to the former reading of 0.4%.
- US consumer inflation data will significantly influence market expectations for Federal Reserve rate cuts, which investors are currently anticipating from the September meeting. The CME FedEWatch tool shows that there is a 61% chance that interest rates will come down from their current range of 5.25%-5.50%.
- Before the US CPI data, investors will focus on the US Producer Price Index (PPI) data for April, which will be published on Tuesday. The producer inflation data will indicate whether business owners hiked or reduced prices of goods and services at the premises.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is subdued near 105.30 in Monday’s European session. Last week, the US Dollar came under pressure after a significant rise in Initial Jobless Claims for the week ending May 3 that dampened investors’ confidence in US labor market strength.
Technical Analysis: EUR/USD plays around 200-day EMA
EUR/USD recovers Friday’s losses and rises to 1.0780, close to the 200-day Exponential Moving Average (EMA), which trades around 1.0780.
The shared currency pair is steadily approaching the downward-sloping border of the Symmetrical Triangle pattern formed on a daily timeframe, which is plotted from December 28 high around 1.1140. The upward-sloping border of the triangle pattern is marked from the October 3 low at 1.0448. The Symmetrical Triangle formation exhibits a sharp volatility contraction.
The 14-period Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among market participants.
Euro FAQs
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%).
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.
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.
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.
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.
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