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- EUR/USD gains further as US Dollar declines with US inflation in focus
EUR/USD gains further as US Dollar declines with US inflation in focus
- EUR/USD rose to a fresh one-month high near 1.0850 amid weakness in the US Dollar ahead of the US inflation data for June.
- The US Dollar declines as Fed’s Powell took away fears of inflation remaining persistent.
- The Euro capitalizes on easing fears of a widening French financial crisis and diminishing ECB rate cut prospects.
EUR/USD posts a fresh one-month high at around 1.0850 in Thursday’s European session. The major currency pair strengthens as the US Dollar (USD) is facing selling pressure due to firm expectations that the Federal Reserve (Fed) will start reducing interest rates in September. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges lower to near 104.90.
Market speculation for Fed rate cuts in September increased as comments from Fed Chair Jerome Powell, in the semi-annual Congressional testimony, indicated that the central bank has made quite a bit of progress in inflation and that labor market strength appears to have eased. Powell refrained from announcing a victory on inflation and said rate cuts would be appropriate when policymakers gain confidence that inflation will return to the desired rate of 2%.
For meaningful guidance on the interest rate outlook, investors await the US Consumer Price Index (CPI) data for June, which will be published at 12:30 GMT. The CPI report is expected to show that the core inflation, which strips off volatile food and energy items, grew steadily by 0.2% and 3.4% on monthly and annual basis, respectively. Annual headline inflation is estimated to have decelerated to 3.1% from May’s reading of 3.3%, while the monthly figure is expected to have barely grown after remaining unchanged in May.
A scenario in which price pressures remain sticky or hotter-than-expected would force trades to pare bets of rate cuts in September. On the contrary, soft numbers will be favorable for lowering borrowing costs. A decline in the US inflation would also increase confidence that the disinflation process has resumed and high price pressures recorded in the first quarter were mere a short-term blip.
Daily digest market movers: EUR/USD rises as prospects of ECB’s subsequent rate cuts wane
- EUR/USD moves higher to 1.0850 as concerns over the widening French financial crisis ease as Marine Le Pen’s far-right National Rally failed to maintain dominance over French President Emmanuel Macron's centrist alliance and the left-wing coalition, also known as New Popular Front, led by Jean-Luc Melenchon.
- Economists were worried about the far right coming to power, which was expected to steer fiscal expansion. Currently, the centrist alliance is expected to join hands with the left wing to form a coalition government.
- Apart from diminishing fears of French financial crisis, easing expectations of subsequent rate cuts by the European Central Bank (ECB) have also brought stability to the Euro’s appeal.
- Traders pare bets favoring ECB’s back-to-back rate cuts as ECB policymakers hesitate to commit to a specific rate-cut path. ECB officials worry that an aggressive approach could revamp price pressures again. However, they are comfortable with expectations of more rate cuts this year.
- Meanwhile, revised estimates for the German Harmonized Index of Consumer Prices (HICP) confirmed that price pressures decelerated in June. Annual HICP grew at a slower pace of 2.5% from May’s reading of 2.8%.
Technical Analysis: EUR/USD delivers Bullish Flag breakout
EUR/USD strengthens after delivering a breakout of the Bullish Flag formation in a 4-hour timeframe. A breakout of the above-mentioned chart pattern results in a continuation of the trend, which in this case is bullish.
The 20-period Exponential Moving Average (EMA) near 1.0825 continues to support the Euro bulls.
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.
Going forward, the psychological figure of 1.0900 will be a key target for the Euro bulls. On the downside, the June 19 high at around 1.0750 will be a major support zone.
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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