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- EUR/USD hovers near 1.0850 with focus on Eurozone inflation and Fed policy
EUR/USD hovers near 1.0850 with focus on Eurozone inflation and Fed policy
- EUR/USD trades back and forth near 1.0850 ahead of crucial Eurozone/US events.
- The ECB may cut interest rates two more times this year.
- The Fed is expected to openly endorse rate cuts in September.
EUR/USD trades in a tight range near 1.0850 in Monday’s European session. The major currency pair struggles for direction as investors have sidelined ahead of the Eurozone preliminary Harmonized Index of Consumer Prices (HICP) for July and the Federal Reserve’s (Fed) monetary policy announcement on Wednesday.
The Eurozone inflation data will indicate whether market expectations for two more rate cuts by the European Central Bank (ECB) this year are appropriate. A few ECB policymakers are comfortable with speculation of two more rate cuts amid a dismal economic outlook and confidence that price pressures are on track to return to the desired rate of 2% next year.
Admitting to slower demand in the Eurozone’s largest nation, German Finance Minister Christian Lindner announced tax relief for corporations and households to spur spending and investment.
Annually, headline and core HICP, which excludes volatile items like food, energy, alcohol, and tobacco, are estimated to have decelerated to 2.3% and 2.8%, respectively.
Before the Eurozone inflation data, investors will focus on the preliminary Eurozone Q2 Gross Domestic Product (GDP) and inflation data of Germany and Spain, which will be published on Tuesday.
Daily digest market movers: EUR/USD juggles ahead of key economic events
- EUR/USD consolidates in a tight range near 1.0850 in Monday’s European session, with investors focusing on the Federal Reserve’s interest rate decision. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades sideways above the crucial support of 104.00.
- The Fed is expected to leave interest rates unchanged in the range of 5.25%-5.50%. Therefore, investors will keenly focus on the monetary policy statement and Fed Chair Jerome Powell’s press conference to get fresh cues about rate cuts.
- Market experts see the Fed communicating openly about rate cuts in the September meeting amid significant progress in inflation declining towards the bank’s target of 2% and rising risks to the labor market. Fears of inflation remaining persistent have waned as input prices have decelerated significantly in the last quarter. Flash United States (US) Q2 GDP report showed that the Price Index decelerated at a faster pace to 2.3% from the estimates of 2.6% and the prior release of 3.1%.
- Also, sticky US core Personal Consumption Expenditures Price Index (PCE) data for June failed to dash expectations of Fed rate cuts in September. Monthly core PCE inflation grew at a higher pace of 0.2% from expectations and the prior release of 0.1%, with annual figures growing steadily by 2.6%.
- This week, investors will also focus on a slew of economic data such as JOLTS Job Openings for June, ADP Employment Change, ISM Manufacturing Purchasing Managers Index (PMI), and Nonfarm Payrolls data for July.
Technical Analysis: EUR/USD consolidates near 1.0850
EUR/USD stays in a tight range near 1.0850. The shared currency pair remains inside a Symmetrical Triangle formation on a daily timeframe after failing to hold the breakout. The major currency pair extends its downside below the 20-day Exponential Moving Average (EMA), which trades around 1.0840. The shared currency pair could slide further towards round-level supports near 1.0800 and 1.0700.
The 14-day Relative Strength Index (RSI) returns within the 40.00-60.00 range, suggesting the bullish momentum has faded.
On the upside, the round-level resistance of 1.0900 will be a key barrier for the Euro bulls.
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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