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- EUR/USD finds support as US Dollar edges down ahead of CPI, Fed decision
EUR/USD finds support as US Dollar edges down ahead of CPI, Fed decision
- EUR/USD finds support near 1.0710 but the outlook remains uncertain ahead of an eventful New York session.
- The US CPI and the Fed’s dot plot will provide cues about the time frame and number of rate cuts this year.
- ECB policymakers refrain from providing a specific interest-rate path.
EUR/USD edges higher to 1.0750 in Wednesday’s European session ahead of the United States (US) Consumer Price Index (CPI) data for May and the Federal Reserve’s (Fed) interest rate decision, which are scheduled for the American session. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls slightly to 105.20.
Investors will pay close attention to US inflation data and the Fed’s dot plot as it is widely expected that the central bank will leave interest rates unchanged in the range of 5.25%-5.50% for the seventh time in a row. The US inflation data will provide cues about when the Fed will start reducing interest rates. The Fed’s dot plot indicates where policymakers see the federal funds rate heading in the medium and long-term time frames.
Economists see US annual core inflation, which strips off volatile food and energy prices, decelerating to 3.5% from April’s reading of 3.6%. In the same period, headline inflation is expected to have grown steadily by 3.4%. Monthly headline CPI is estimated to have grown at a slower pace of 0.1% from 0.3% in April, with core inflation rising steadily by 0.3%.
Currently, financial markets are mixed about the Fed choosing the September meeting as the one in which the central bank will begin cutting interest rates. Traders pared Fed rate-cut bets for September after the US Nonfarm Payrolls (NFP) report for May indicated robust job demand and strong wage growth, which suggested a stubborn inflation outlook.
The new projections for the number of rate cuts are expected to show fewer rate cuts compared to the three predicted In March’s dot plot as officials lose confidence over progress in the disinflation process. Consumer Price Index (CPI) data for the January-March period turned out to be stronger than expected, highlighting the persistence of inflation. However, price pressures abated as expected in April but failed to bring conviction that the disinflation process has resumed.
Daily digest market movers: EUR/USD steadies as US Dollar falls slightly
- EUR/USD finds a cushion and rebounds slightly to 1.0750 despite caution ahead of an eventful New York session and uncertainty surrounding the French elections. Political stability in the Eurozone shaked after French President Emmanuel Macron’s decision to call for a snap election after suffering a defeat by Jordan Bardella-led far-right National Rally, popularly known as Rassemblement National (RN).
- Exit polls on Monday showed that the RN party could win 235 to 265 seats, still short of the 289 needed for an absolute majority, Reuters reported. Analysts see Macron’s decision to call a snap election as a gamble that could further weaken the position of the Centralist alliance.
- Meanwhile, uncertainty over the European Central Bank’s (ECB) interest-rate path appears to be waning as policymakers are holding themselves back from committing to any specific rate-cut trajectory. ECB officials worry that inflation could remain sticky in the next few months due to steady wage growth, which fuels service inflation. In May, Eurozone service inflation rose to 4.1%, the highest in seven months.
- ECB policymaker and Governor of the French central bank Francois Villeroy de Galhau said on Tuesday that he is confident that price pressures will return to its 2% target next year but they have to pass through some bumps in monthly data. "This 'noise' is not very meaningful, and hence we are still more 'outlook driven' and will look still more closely at the inflation forecast,” Villeroy added, according to Reuters.
Technical Analysis: EUR/USD returns inside triangle formation
EUR/USD finds temporary support after sliding to an almost five-week low near 1.0710. The near-term outlook of the major currency pair remains downbeat as it has fallen back inside the Symmetrical Triangle chart formation on a daily time frame after a fakeout. The shared currency pair is expected to find support near 1.0636, the upward-sloping order of the above-mentioned chart pattern plotted from 3 October 2023 low at 1.0448.
The long-term outlook of the shared currency pair 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 the same 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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