EUR/USD clings to gains near 1.0900 in Monday’s European session. The major currency pair remains in bullish territory due to investors’ higher risk appetite. The Euro has performed strongly in the past few trading sessions as market participants turn slightly cautious about whether the European Central Bank (ECB) will extend the policy-tightening spell beyond the June meeting.
The ECB is widely anticipated to start reducing interest rates from the June meeting. However, ECB policymakers remain divided over the rate-cut move in the July meeting. A few policymakers remain worried that an aggressive rate-cut cycle could revamp price pressures and offset the impact yet made on inflation.
Last week, ECB board member Isabel Schnabel said that depending on incoming data, a rate cut in June may be appropriate but the path beyond June is much more uncertain. Schnabel added that she cannot pre-commit to any particular rate path due to very high uncertainty.
On the economic data front, investors will shift focus to the Eurozone and the United States preliminary Purchasing Managers Index (PMI) data for May, which will be published on Thursday. The PMI data will indicate their economic outlook.
EUR/USD holds the breakout of the Symmetrical Triangle chart pattern seen on a daily timeframe. The stabilization of the major currency pair above the breakout region suggests that the asset is quite bullish. Also, a bullish crossover of the 20-day and 50-day Exponential Moving Averages (EMAs) around 1.0780 has improved the near-term outlook of the pair.
The 14-period Relative Strength Index (RSI) has shifted comfortably into the bullish range of 60.00-80.00, suggesting that the momentum has leaned toward the upside.
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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