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- Euro looks cautious near 1.0740 ahead of ECB rate decision
Euro looks cautious near 1.0740 ahead of ECB rate decision
- The Euro appears mildly bid vs. the US Dollar.
- Stocks in Europe opened Thursday’s session mostly in the red.
- EUR/USD continues to trade in a consolidative mood this week.
- The USD Index (DXY) has met decent resistance around 105.00 so far.
- The ECB is seen pausing its tightening campaign at its meeting.
- Producer Prices and Retail Sales take centre stage across the Atlantic.
It is ECB Day, and the Euro (EUR) manages to print humble gains against the US Dollar (USD) on Thursday, motivating EUR/USD to hover around 1.0740 so far in the European morning.
On the other side, the Greenback navigates a tight range in the 104.70 zone when measured by the USD Index (DXY), accompanied by a broad-based lack of direction in US yields across the curve as well as alternating risk appetite trends.
With regards to monetary policy, investors persist in anticipating the possibility of interest rate reductions by the Federal Reserve (Fed) occurring sometime in the second quarter of 2024.
Shifting our focus to the European Central Bank (ECB), market deliberations appear to suggest an impasse at the upcoming event and a 25 bps rate increase by the end of the year. This outlook is influenced by the current state of a somewhat divided Council.
Still around the ECB, a probable pause in the bank’s hiking cycle appears justified by the persistent deterioration of key fundamentals in Germany and the broader euro area, while inflation in the region keeps running hot and well above the bank’s target. In addition, overtightening fears coupled with rising stagflation concerns should further underpin a probable (hawkish?) hold by the ECB later on Thursday.
Data-wise, in the US, the focus of attention is expected to be on the release of Producer Prices along with Retail Sales and the usual weekly Initial Jobless Claims.
Euro FAQs
What is the Euro?
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%).
What is the ECB and how does it impact the Euro?
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.
How does inflation data impact the value of the Euro?
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.
How does economic data influence the value of the Euro?
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.
How does the Trade Balance impact the Euro?
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.
Daily digest market movers: Euro looks prudent ahead of ECB, US data
- The EUR gathers some fresh steam vs. the USD.
- US and German yields have traded without a clear direction so far.
- Investors see the ECB keeping the deposit rate unchanged on Thursday.
- Australia released an upbeat jobs report.
- Markets keep factoring in potential rate cuts by the Fed in Q2 2024.
- US inflation, this time from Producer Prices, will remain in the limelight.
- Market participants are expected to scrutinize Lagarde’s press conference.
Technical Analysis: Euro remains under downside pressure below 1.0830
EUR/USD appears to have embarked on a range bound theme, always below the 1.0800 hurdle, so far this week.
Should EUR/USD successfully break below its September low at 1.0685 (September 7), it may enter a phase of retesting the May low at 1.0635 (May 31) before potentially reaching the March low at 1.0516 (March 15). If the latter level is breached, it could initiate a possible examination of the 2023 low at 1.0481 (January 6).
On the other hand, the primary focus currently lies on targeting the crucial 200-day SMA at 1.0827. If the pair surpasses this level, a bullish momentum might ensue, leading to a challenge of the weekly peak at 1.0945 (August 30). This upward movement could be further supported by the provisional 55-day SMA at 1.0932. Subsequently, this scenario could pave the way for an advance towards the psychological level of 1.1000 and the August high at 1.1064 (August 10). If the spot clears this area, it could alleviate some of the bearish pressure and potentially aim for the weekly top at 1.1149 (July 27), followed by the 2023 high at 1.1275 (July 18).
It is crucial to note that as long as the EUR/USD remains below the 200-day SMA, there remains a possibility of a sustained decline in the pair.
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