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- EUR/USD trades close to 1.0900 as Fed rate-cut bets shoot
EUR/USD trades close to 1.0900 as Fed rate-cut bets shoot
- EUR/USD gains as soft US inflation reading boosts Fed rate-cut prospects.
- A rate-cut move by the Fed in September appears to be a done deal.
- The defeat of the far right has waned immediate risks of widening the French financial crisis.
EUR/USD rises to near 1.0880 in Friday’s European session. The major currency pair strengthens as fears of a financial crisis in the Eurozone’s second-largest nation diminished, and easing expectations of subsequent interest rate cuts by the European Central Bank (ECB) next week have improved the Euro’s outlook.
Immediate risks of a widening financial crisis in France have waned as Marine Le Pen’s far-right National Rally failed to maintain dominance over other parties. Economists were worried that the far right could boost fiscal spending if it came into power. However, uncertainty over the new fiscal policy framework remains high due to the expected coalition of French President Emmanuel Macron's centrist alliance and the left wing, also known as the New Popular Front, led by Jean-Luc Mélenchon.
Meanwhile, expectations for the ECB's subsequent rate cuts have diminished as officials see price pressures remaining close to their current levels for the entire year. ECB policymakers have refrained from committing a pre-defined rate-cut path as they worry that an aggressive policy expansion could revamp price pressures again.
Daily digest market movers: EUR/USD rises as far right’s defeat improves Euro’s outlook
- EUR/USD moves higher and trades close to a fresh monthly high at 1.0900, posted on Thursday. The near-term outlook of the shared currency pair strengthens as investors expect that an interest rate cut by the Federal Reserve (Fed) in the September meeting is a done deal.
- According to the CME FedWatch tool, the central bank is certain to cut interest rates in September and is also expected to deliver a subsequent rate cut in the November or December meeting. The expectations for Fed rate cuts have been prompted by the United States (US) Consumer Price Index (CPI) data for June, published on Thursday, which indicated that the disinflation process has resumed after a hiatus in the first quarter of this year.
- Annual core inflation, which is generally considered by Fed officials for decision-making on interest rates as it excludes volatile food and energy items, unexpectedly decelerated to 3.3%. Economists expected the underlying inflation to have increased steadily by 3.4%. The headline inflation rose to 3.0%, the lowest reading in a year, due to easing energy prices and rentals. Monthly headline inflation deflated by 0.1% after remaining unchanged in May.
- Cooling US inflationary pressures and easing labor market conditions have increased Fed officials’ confidence that inflation is on course to return to the desired rate of 2%. San Francisco Fed President Mary Daly said on Thursday that a slowdown in inflationary pressures is a “welcome relief” and bolsters the case for lower interest rates. However, the timing remains a matter of debate, Reuters reported.
- Improving Fed rate cut expectations is an unfavorable situation for the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, seems vulnerable near 104.40.
- Meanwhile, investors await the US Producer Price Index (PPI) data for June, which will be published at 12:30 GMT. Producer inflation is expected to have grown at a higher pace on a monthly as well as annual basis.
Technical Analysis: EUR/USD sets to deliver triangle breakout
EUR/USD gathers strength to deliver a breakout of the Symmetrical Triangle formation on the daily timeframe. The major currency pair hovers near the downward-sloping border of the above-mentioned chart pattern around 1.0880, which is plotted from the March 8 high at 1.0980. The upward-sloping border of the triangle formation is marked from the April 16 low around 1.0620.
Advancing 20-day Exponential Moving Average (EMA) near 1.0800 suggests that the near-term trend is bullish.
The 14-day Relative Strength Index (RSI) establishes into the bullish range of 60.00-80.00, indicating that momentum has leaned to the upside.
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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