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- EUR/USD juggles as Fed officials support higher for longer interest rates
EUR/USD juggles as Fed officials support higher for longer interest rates
- EUR/USD trades back and forth around 1.0850 with eyes on FOMC minutes and preliminary Eurozone and US PMIs.
- Doubts are rising over the possibility that the ECB will extend the rate-cut cycle beyond June.
- Fed officials say they need to see more soft inflation data to be sure that inflation will return to 2%.
EUR/USD is stuck in a tight range near 1.0850 in Tuesday’s European session. The major currency pair is expected to continue its sideways performance as the US Dollar (USD) stabilizes ahead of the publication later this week of the Federal Open Market Committee (FOMC) Minutes and the preliminary S&P Global Purchasing Managers Index (PMI) data for May.
The Euro trades relatively firm against the US Dollar (USD) as uncertainty over the European Central Bank (ECB) extending the rate-cut cycle beyond June has deepened. ECB policymakers are comfortable with the central bank starting to lower its three key interest rates from the June meeting, but are reluctant to commit to any further rate path and said they prefer to remain data-dependent.
Some ECB policymakers cautioned that a follow-up rate cut in the July meeting could revamp price pressures and offset the impact of the job done to tame sticky price pressures.
Daily digest market movers: EUR/USD stays calm ahead of Eurozone, US PMIs
- EUR/USD consolidates in a tight range near 1.0850 as investors look for fresh cues about the interest rate outlook on both sides of the Atlantic. As for the United States, Federal Reserve (Fed) officials continue to emphasize the need to maintain the restrictive policy framework as they are not convinced that price pressures will sustainably return to the desired rate of 2%.
- US inflation declined as expected in April. However, Fed policymakers want to see more good inflation data to gain confidence that price growth is on course to return to the 2% target. Therefore, Fed policymakers reiterate that the current monetary policy is in good shape and needs to remain at its current levels.
- On Monday, Fed Vice Chair for Supervision Michael Barr said "Q1 inflation was disappointing and did not provide the confidence needed to ease monetary policy". Barr vowed to allow more time for a tight policy stance to do its job, Reuters reported. Separately, Atlanta Fed Bank President Raphael Bostic said to Bloomberg TV that officials would take a while to be certain that inflation will come down to 2%.
- Meanwhile, investors shift focus to the FOMC minutes for the May policy meeting, which will be published on Wednesday. Officials' view on the interest rate outlook in the May meeting is expected to be hawkish as hotter-than-expected inflation in the January-March period indicated that the progress in the disinflation process stalled.
- On the economic data front, investors await the preliminary Eurozone and United States PMI data for May, which will be published on Thursday. The PMI data will gauge the economic outlook of the respective nations.
Technical Analysis: EUR/USD consolidates around 1.0850
EUR/USD trades in a narrow range around 1.0850 as investors look for fresh triggers that could guide the next potential move. The shared currency pair is broadly firm as it is holding the Symmetrical Triangle breakout that formed on the daily time frame. Also, a bullish crossover involving the 20-day and 50-day Exponential Moving Averages (EMAs) around 1.0780 has improved the near-term outlook of the shared currency pair.
The 14-period Relative Strength Index (RSI) has shifted comfortably into the range of 60.00-80.00, suggesting that the momentum has turned bullish.
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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