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- EUR/USD holds above 1.0900 while investors look for more cues on Fed-ECB policy
EUR/USD holds above 1.0900 while investors look for more cues on Fed-ECB policy
- EUR/USD rises as the US Dollar corrects on firm Fed rate-cut prospects.
- Investors see the Fed cutting interest rates aggressively this year.
- The ECB is expected to reduce its key borrowing rates two times more by the year-end.
EUR/USD edges higher to near 1.0940 in Thursday’s European session. The major currency pair rises as the US Dollar corrects from a three-day high. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to near 103.00.
The shared currency pair broadly consolidates in a tight range above the round-level support of 1.0900, with investors looking for more cues about whether the Federal Reserve (Fed) will choose an aggressive monetary policy stance to tame upside risks to potential United States (US) economic slowdown.
According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that traders see 50 basis points (bps) cut in interest rates in September as imminent. The data also suggests that the Fed will reduce its key borrowing rates by more than 100 bps this year. Meanwhile, market participants have also anticipated that the Fed could announce emergency rate cuts as the US economy is exposed to a recession.
On the contrary, Economists at Goldman Sachs wrote in a note, “So while market stress is noticeably higher than a week ago, our Financial Stress Index (FSI) suggests that there have been no serious market disruptions to date that would force policymakers to intervene."
Market speculation that the Fed would deliver hefty rate cuts was bolstered by upside risks to job growth and a sharp contraction in the manufacturing sector. For more cues on the current labor market status, investors will focus on the US Initial Jobless Claims data for the week ending August 2, which will be published at 12:30 GMT.
Economists have estimated that individuals claiming jobless benefits for the first time were 240K, lower than the prior release of 249K.
Daily digest market movers: EUR/USD consolidates above 1.0900
- EUR/USD trades in a tight range above 1.0900 since Tuesday amid an absence of top-tier economic data in the Eurozone. Therefore, the Euro will be influenced by market sentiment and speculation for European Central Bank (ECB) and US Federal Reserve (Fed) rate cuts this year.
- The market mood remains risk-averse on fears of a global economic slowdown due to the maintenance of a restrictive interest rate stance for a longer period. The majority of global nations have pivoted to policy normalization, but the broader demand will not revive sooner.
- Meanwhile, investors expect that the ECB will cut its key borrowing rates two times more this year. The ECB kicked off its policy-easing cycle in June as policymakers were confident that price pressures would return to the desired rate of 2% in 2025. However, officials prefer to avoid committing to a specific rate-cut path and left interest rates unchanged in the July meeting, keeping a cautious approach to rate cuts.
- Regarding interest rate guidance, Finnish ECB policymaker Olli Rehn said in a speech on Wednesday, "Inflation continues to slow down, but the path to the two percent target remains bumpy this year." Rehn added, “The rate cuts would help the eurozone economy recover, in particular the "fragile" industrial growth and subdued investments,” Reuters reported.
Technical Forecast: EUR/USD trades close to upper boundary of Channel formation
EUR/USD hovers near the upper boundary of a Channel formation on a daily timeframe. A breakout of the aforementioned chart pattern results in wider ticks on the upside and heavy volume. The 200-day Exponential Moving Average (EMA), near 1.0800, acted as major support for the Euro bulls.
The 14-day Relative Strength Index (RSI) indicator in the daily chart climbs above 60.00. If the RSI sustains above that level, bullish momentum will be triggered.
More upside would appear if the major currency pair breaks above Monday’s high of 1.1009. This would drive EUR/USD towards the August 10, 2023, high at 1.1065, followed by the round-level resistance at 1.1100.
In an alternate scenario, a downside move below the August 1 low at 1.0777 would drag the pair toward the February low near 1.0700. A breakdown below the latter would expose the asset to the June 14 low at 1.0667.
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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