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- Euro consolidates near recent highs favoured by USD weakness
Euro consolidates near recent highs favoured by USD weakness
- The Euro loses steam right below 1.1000, with downside attempts limited for now.
- The US Dollar remains weak as the market ignores Fed officials’ warnings about excessive optimism.
- The positive risk sentiment is keeping Euro bears subdued.
The Euro (EUR) recovery from Monday’s lows has lost steam right below the 1.1000 level, yet with bearish attempts lacking follow through. The US Dollar (USD) remains depressed near multi-month lows against most rivals, which is keeping the pair from a deeper reversal.
The positive market sentiment, with markets pricing in a quarter-point cut by the Federal Reserve (Fed) in March, keeps fuelling investors’ appetite for risk, underpinning support for the common currency.
On the other hand, recent macroeconomic data from the Eurozone is painting a grim outlook, which is likely to keep Euro bulls at bay. The final Consumer Prices Index (CPI) for November confirmed the disinflationary trends, and Monday’s IFO survey showed sentiment is deteriorating among German businesses.
These figures, combined with the weak Q3 GDP and the contracting services and manufacturing PMIs, bring into question the hawkish stance shown by the European Central Bank (ECB) after December´s meeting.
Daily digest market movers: Euro remains steady near four-month highs
- The Euro has lost steam on Wednesday, yet with bearish attempts limited amid the positive market sentiment.
- Atlanta Fed president Raphael Bostic affirmed that there is no “urgency” to cut rates and pointed to the second quarter of 2024 for the first easing move.
- Later today, Chicago Fed President Austan Goldsbee, a hawk, is likely to push back rate cut hopes.
- Investors keep pricing in nearly 75% chance that the US central bank will cut rates by 0.25% in their March meeting, according to data by the CME Group Fed Watch Tool.
- The uncertainty in the Red Sea has forced shipping companies to reroute their shipments. This is pushing Oil prices higher, which is likely to hurt the Euro, as the Eurozone is a net Oil importer.
- The US Dollar maintains its weak tone, with the US Dollar Index (DXY) fluctuating near four-month lows, weighed by low US bond yields.
Technical Analysis: Euro loses steam below 1.1000
Euro sellers have shown up right below 1.1000, pushing the pair to the mid-range of 1.0900. The US Dollar Index remains capped below previous support at 102.45 and the market mood is favourable, which maintains recent highs at a short distance.
From a wider perspective, the broader trend remains bullish, although resistance at the 1.1010 area is likely to be a serious obstacle. Above here, the next targets would be the August high at 1.1060, and the July 24 and 27 high at 1.1150.
To the downside, the pair should break the 1.0880 and the 4-hour 100 Simple Moving Average (SMA) at 1.0870 to increase bearish pressure and shift bears’ focus towards 1.0825 on the way to December lows at 1.0715.
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.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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