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- EUR/USD falls inside the woods amid Eurozone political uncertainty
EUR/USD falls inside the woods amid Eurozone political uncertainty
- EUR/USD weakens to 1.0750 on Monday amid multiple headwinds.
- Euro tumbles as French President Emmanuel Macron calls for a snap election, which triggers political uncertainty.
- Strong US labor market data diminishes Fed rate-cut bets, which boosts the US Dollar’s appeal.
EUR/USD extends its decline to 1.0750 on Monday. The major currency pair weakens as political uncertainty in the Eurozone after French President Emmanuel Macron call for a snap election weighed heavily on the Euro. Macron’s unexpected move on Sunday evening came after exit polls indicated that Marine Le Pen’s far-right National Rally (RN) scored 32%-33% seats in European parliamentary elections under the leadership of the party’s president, Jordan Bardella, which was more than double from Macron’s centrist’s list.
After the dramatic announcement of a snap election, Macron added: “I have confidence in our democracy, in letting the sovereign people have their say. I’ve heard your message, your concerns, and I won’t leave them unanswered”, The Guardian reported. However, there could be potential consequences if Macron’s party faces more losses than forecasted by exit polls, which could deepen uncertainty over the Euro’s outlook.
On the monetary policy front, European Central Bank (ECB) policymaker and President of the Deutsche Bundesbank Joachim Nagel warned about a stubborn inflation outlook, especially in the service sector, due to strong wage growth. Worries about inflation becoming sticky suggest that the policy-easing campaign would be slow.
ECB President Christine Lagarde already said in the monetary policy press conference after cutting the central bank’s Deposit Facility Rate by 25 basis points (bps) to 3.75% that the bank is not committing to any specific interest-rate path and will remain data-dependent as inflation could remain bumpy in next few months.
Daily digest market movers: EUR/USD weakens amid uncertainty ahead of US CPI and Fed monetary policy
- EUR/USD tumbles to 1.0750 due to weak Euro amid political uncertainty and firm US Dollar (USD) as strong United States (US) labor market data has diminished market expectations for the Federal Reserve (Fed) to start reducing interest rates from their current levels in the September meeting. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends recovery to an almost four-week high near 105.30.
- The CME FedWatch tool shows that 30-Day Fed Funds futures pricing data suggest a 47% chance that interest rate will be lower than the current level in September, significantly down from the 59.6% recorded a week ago.
- The US Nonfarm Payrolls (NFP) report for May showed on Friday that fresh recruitments came in at 272K, higher than expectations of 185K and the prior release of 165K. Labor demand remaining stronger than expected continues to buy more time for Fed policymakers to maintain their current interest rate framework.
- Average Hourly Earnings data, a measure of wage inflation that dictates households’ spending, came higher than expected. Annual wage inflation measures accelerated to 4.1% in May from the consensus of 3.9% and April’s read of 4.0%. On a month-on-month basis, wage inflation measures rose strongly by 0.4% from the estimates of 0.3% and the former release of 0.2%.
- Meanwhile, investors shift their focus to the US Consumer Price Index (CPI) data for May and the Fed’s monetary policy decision, which are scheduled for Wednesday. The Fed is widely anticipated to maintain interest rates steady in the range of 5.25%-5.50% with a hawkish outlook as the last mile for inflation to return to the desired rate of 2% appears to be stickier.
Technical Analysis: EUR/USD falls inside Triangle after a fakeout
EUR/USD returns inside the Symmetrical Triangle formation on a daily timeframe after failing to hold the breakout move, suggesting that the move was fake and the overall trend has turned bearish. The major currency pair is expected to find support near the upward-sloping trendline of the above-mentioned chart pattern, plotted from October 3, 2023, low at 1.0448, near 1.0636.
The pair’s long-term outlook has also turned negative as it drops below the 200-day Exponential Moving Average (EMA), which trades around 1.0800.
The 14-period Relative Strength Index (RSI) falls sharply to 40.00. A decisive break below that level would trigger a bearish momentum.
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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