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- EUR/USD remains firm ahead of ECB’s policy meeting and US NFP report
EUR/USD remains firm ahead of ECB’s policy meeting and US NFP report
- EUR/USD trades below 1.0900 ahead of the ECB’s monetary policy announcement.
- The ECB is expected to announce a rate cut by 25 bps for the first time in five years.
- The US NFP will significantly influence market speculation for the Fed rate cut in September.
EUR/USD rises in Thursday’s European session but remains broadly sideways below the round-level resistance of 1.0900. The major currency pair is expected to remain quiet ahead of the European Central Bank’s (ECB) monetary policy decision, which will be announced at 12:15 GMT.
The monetary policy decision is expected to deliver changes in the Eurozone’s economic prospects and the Euro’s next move even though ECB policymakers have already communicated their intention to cut the Deposit Facility Rate by 25 basis points (bps) to 3.75%. However, they have been reluctant to suggest a specific policy path beyond June as the battle against inflation has not won yet.
The last mile in the price index returning to the central bank’s desired rate of 2% appears to be stickier than expected due to stubbornly higher service inflation, which is significantly influenced by wage growth, and improved Eurozone’s economic outlook. Service inflation rose to 4.1% in May, the highest in seven months. The Gross Domestic Product (GDP) grew at a higher pace of 0.3% after contracting consecutively for last two quarters of 2023.
Over the interest rate outlook, ECB officials are not expected to commit to any subsequent rate-cut move in July or any other meeting and will remain data-dependent. Currently, financial markets expect the ECB to deliver two more rate cuts this year.
Daily digest market movers: EUR/USD rises as US Dollar retreats
- EUR/USD remains sideways below 1.0900. The major currency pair grinds between uncertainty ahead of the ECB’s interest rate decision and a soft US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, retreats while attempting to extend recovery above the crucial resistance of 104.40.
- The USD Index drops to 104.00 as the impact of the strong United States (US) Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) report for May was offset by easing labor market strength.
- The ISM Services PMI, which gauges the service sector activity that accounts for two-thirds of the economy, returned to expansion in May and jumped to 53.8 from the estimates of 50.8 and the prior reading of 49.4. In the same period, the New Orders Index, which reflects forward demand, jumped to 54.1 from the former release of 52.2.
- Meanwhile, US labor market conditions appear to have started normalizing amid the pressure from the Federal Reserve’s (Fed) more than two-year-long restrictive policy framework. The US JOLTS Job Openings data for April and ADP Employment Change for May came out below their forecasts and prior readings.
- Easing labor market strength has also boosted market expectations for the Fed to start reducing interest rates in September. The CME FedWatch tool shows a 68% chance that the interest rate will be lower than the current level in September. The probability has significantly improved from 50% recorded a week ago.
- Going forward, investors will shift focus to the US Nonfarm Payrolls (NFP) data for May, which will be published on Friday. The NFP report is expected to show that employers hired 185K new employees, higher than the prior release of 175K.
Technical Analysis: EUR/USD trades close to 1.0885 resistance
EUR/USD is stuck in a tight range below 1.0900. The major currency pair forms an Inverted Head and Shoulder (H&S) pattern on a daily timeframe, which would result in a bullish reversal after breaking the neckline marked from the April 9 high at 1.0885.
The near-term outlook remains firm due to a golden cross formation amid a bullish crossover of 50-day and 200-day Exponential Moving Averages (EMAs) near 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.
If the major currency pair decisively breaks above the round-level resistance of 1.0900, it is expected to extend its upside towards the March 21 high, around 1.0950, and the psychological resistance of 1.1000. However, a downside move below the 200-day EMA at 1.0800 could push it into a 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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