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- EUR/USD sidelines ahead of ECB policy meeting
EUR/USD sidelines ahead of ECB policy meeting
- EUR/USD juggles in a tight range with the focus on the ECB policy meeting and US economic data.
- The ECB is widely expected to deliver a rate-cut move with a data-dependent approach for the interest rate path.
- Normalizing US labor market conditions has boosted Fed rate-cut bets for September.
EUR/USD is stuck in a tight range around 1.0880 in Wednesday’s European session. The major currency pair turns rangebound amid caution ahead of the European Central Bank’s (ECB) interest rate decision, which will be announced on Thursday.
The ECB is widely anticipated to cut its Deposit Facility rate by 25 basis points (bps) to 3.75%. Therefore, investors will focus on the ECB’s guidance on the interest rate outlook to project the next move in the Euro.
Higher-than-expected increase in the Eurozone’s annual Harmonized Index of Consumer Prices (HICP) data, service inflation and Q1 Gross Domestic Product (GDP) suggest that price pressures could become persistent in the coming months. Therefore, ECB officials would prefer to remain data-dependent and push back expectations for subsequent rate cuts. Currently, financial markets expect that the ECB will cut interest rates at least twice this year.
Daily digest market movers: EUR/USD remains sideways ahead of US ISM Services PMI
- EUR/USD trades sideways around 1.0880 as the US Dollar index (DXY) holds the crucial support ahead of the crucial United States (US) economic calendar on Wednesday: The ADP Employment Change and the Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) data for May, which will be published at 12:15 and 14:00 GMT, respectively.
- Economists have forecasted that US private employers hired 173K job-seekers in May, lower than the former reading of 192K. A slower hiring pace would deepen fears of normalizing labor market conditions. On Tuesday, the US JOLTS Job Opening report showed that job postings came in lower at 8.06 million in April, from the expectations of 8.34 million and the former release of 8.35 million.
- The perception of normalizing labor market conditions and the economy’s growth prospects have fuelled expectations that the Federal Reserve (Fed) will begin lowering interest rates from the September meeting. The CME FedWatch tool shows that the probability of a rate cut in the September meeting has increased to 65% from 47% a week ago.
- Meanwhile, the US ISM Services PMI is estimated to have returned to expansion, seen at 50.5, higher than the former reading of 49.4. Investors will keenly focus on the Services PMI as it gauges the service sector activity, which accounts for two-thirds of the economy. In addition to services PMI, investors will also focus on other subcomponents, such as New Orders and Prices Paid indices, which reflect forward demand and changes in input prices.
- Later this week, the release of the US Nonfarm Payrolls (NFP) report for May will significantly influence market speculation about the Fed reducing interest rates from the September meeting.
Technical Analysis: EUR/USD exhibits sideways trend
EUR/USD hovers around 1.0880 ahead of crucial US economic data. The major currency pair trades inside Tuesday’s trading range. The near-term outlook of the pair remains firm due to the Symmetrical Triangle breakout on a daily timeframe and upward-sloping 50-day Exponential Moving Average (EMA), which trades around 1.0800.
The 14-period Relative Strength Index (RSI) has slipped into the 40.00-60.00 range, suggesting that the momentum, which was leaned toward the upside, has faded for now.
The major currency pair is expected to extend its upside towards the March 21 high, around 1.0950, and the psychological resistance of 1.1000 if it breaks above the round-level resistance of 1.0900 decisively. However, a downside move below the 200-day EMA at 1.0800 could push it into the bearish trajectory.
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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