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- Euro remains firm near five-month highs favoured by a weak Dollar
Euro remains firm near five-month highs favoured by a weak Dollar
- The Euro maintains its bullish trend whilst the Dollar’s recovery attempt stalls.
- Investors bets on Fed cuts in 2024 keep USD buyers in check.
- US data released on Thursday strengthened the case for a soft landing in Q4.
The Euro (EUR) remains steady near recent highs on the last trading day of the Year, moving above 1.1050 after Wednesday´s pullback from the 1.1135 high. The pair maintains its broader bullish trend intact, with the US Dollar licking its wounds as the investors ramp up bets on Fed cuts in early 2024.
US Data released on Thursday revealed higher-than-expected Jobless claims while November’s Pending Home Sales remained flat against expectations of a 1% increase.
These figures confirm the theory that the US economy is losing pace in the fourth quarter, and on its way to a soft landing that will allow the US Federal Reserve (Fed) to start reversing the last two years’ tightening cycle.
In the Eurozone, Spanish consumer prices have remained steady at a 3.3% yearly rate. These figures confirm that inflation remains sticky in some countries endorsing the ECB’s hawkish stance and underpinning support for the Euro.
Daily digest market movers: A hawkish ECB and weak US data are buoying the Euro
- The Euro remains firm with the US Dollar languishing at five-month lows amid plunging US yields.
- Spanish Consumer Prices Index remained flat in December and grew at a 3.3% pace on the year, unchanged from the previous month.
- On Thursday, the Governor of the Austrian Central Bank and ECB member, Robert Holzmann observed that there is no guarantee for a rate cut in 2024, which provided some support to the Euro.
- US Weekly Jobless Claims increased by 118K in the week of December 15, beating expectations of a 110K reading.
- US Pending home sales remained flat in November against market expectations of a 1% increase.
- With only the Chicago PMI worth noting for today, recent US data is consistent with the soft-landing scenario that is fuelling bets of Fed cuts in early 2024.
- Futures markets are pricing 85% chances of Fed cuts in March, and 150 bps cuts in the whole year, according to the CME Group FedWatch Tool.
Technical Analysis: Euro maintains its positive tone with downside attempts capped at 1.1050
The Euro is trading without a clear direction on Friday’s European session, with downside attempts limited above 1.1050 following rejection at the 1.1135 area on Thursday. The US Dollar Index recovery attempt seen on Thursday has stalled below previous lows, which is keeping the EUR/USD from a deeper correction.
The broader trend remains bullish with the pullback from Thursday´s highs seen as a corrective reaction from heavily overbought levels. On the downside, below 1.1050, the pair will face support at 1.1010 where the 4h 50 SMA meets previous swing highs and 1.0935.
On the upside, resistance levels remain at the July 27 high, 1.1145, which closes the path toward the 2023 high, at 1.1280.
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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