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- EUR/USD holds onto recent gains despite increasing bets of large ECB rate cut
EUR/USD holds onto recent gains despite increasing bets of large ECB rate cut
- EUR/USD trades above 1.0800, but the downside bias remains firm due to multiple headwinds.
- Traders expect the ECB to announce a sizeable interest rate cut in December.
- The Fed is expected to pursue a gradual rate-cut cycle.
EUR/USD strives to extend Thursday’s recovery above 1.0800 in Friday’s European session. The major currency pair bounced back on Thursday after the release of the flash Hamburg Commercial Bank (HCOB) Eurozone Purchasing Managers Index (PMI) report for October.
The Euro’s recovery could be short-lived as the preliminary PMI report showed that the Eurozone’s economic activity continued to contract, with the flash Composite PMI declining to 49.7 in October. Preliminary readings showed that activities in the manufacturing sector continued to contract, with manufacturing PMI below the 50 threshold that separates expansion from contraction for 28 months, and the service sector output expanded surprisingly at a slower pace. A continuous decline in the Eurozone business activity points to uncertainty over economic growth.
Meanwhile, growing speculation for a larger-than-usual interest rate cut by the European Central Bank (ECB) in its next policy meeting in December is also expected to push back the shared currency pair inside the woods. This year, the ECB has already reduced its Deposit Facility Rate three times by 25 basis points (bps) to 3.25%.
Market expectations for the ECB to reduce its key borrowing rates by 50 bps in December have been boosted by dovish commentaries from a few policymakers who have highlighted risks of inflationary pressures remaining below the bank’s target of 2% due to fears of a downturn.
This week, Governor of the Bank of Portugal and ECB policymaker Mario Centeno said that the option of a 50 bps rate cut in December is on the table. Centeno warned that downside risks to growth are accumulating.
On the economic front, data released on Friday showed that the German IFO Business Climate, Current Assessment, and Expectations for October have come in better than expectations and prior releases. Historically, improving market sentiment points to a revival in economic conditions but the case appears to be unlikely due to weak business activity.
Daily digest market movers: EUR/USD bounces back at US Dollar’s expense
- A recovery in the EUR/USD pair is also driven by a retracement move in the US Dollar (USD) in European trading hours. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, hovers near 104.00 after correcting from a fresh 12-week high of 104.55.
- The near-term appeal of the US Dollar remains firm on multiple tailwinds, such as growing bets for the Federal Reserve (Fed) to follow a more gradual rate-cut cycle and rising expectations of former US President Donald Trump to win the presidential election against current Vice President Kamala Harris.
- Investors' confidence in the Fed’s gradual policy-easing cycle is backed by upbeat Nonfarm Payrolls (NFP) and Retail Sales data for September and better-than-expected flash S&P Global PMI data for October, which pointed to sustainable economic growth.
- On Friday, investors will focus on US Durable Goods Orders data for September, which will be published at 12:30 GMT. The economic data is estimated to have declined by 1% after remaining flat in August.
Technical Analysis: EUR/USD remains below 200-day EMA
EUR/USD holds recovery above 1.0800 in European trading hours. However, the outlook of the major currency pair remains downbeat as it stays below the 200-day Exponential Moving Average (EMA), which trades around 1.0900.
The downside move in the shared currency pair started after a breakdown of a Double Top formation on the daily time frame near the September 11 low at around 1.1000, which resulted in a bearish reversal.
The 14-day Relative Strength Index (RSI) remains inside the 20.00-40.00 range, indicating a strong bearish momentum. However, a recovery move remains on the cards as conditions turn oversold.
On the downside, the major could see more weakness towards the round-level support of 1.0700 if it slips below the upward-sloping trendline (plotted from the October 3 low around 1.0450) at 1.0750. Meanwhile, the 200-day EMA near 1.0900, and the psychological figure of 1.1000 will be the key resistances for the pair.
Euro FAQs
The Euro is the currency for the 19 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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