EUR/USD extends Monday’s upside to near the crucial resistance of 1.1150 in Tuesday’s European session. The major currency pair exhibits strength at the expense of the US Dollar (USD), which is weighed by increasing bets that the Federal Reserve (Fed) will opt for a large interest-rate cut on Wednesday.
The US Dollar trades near a year-to-date-low as the market speculation for a large Fed rate cut has been strengthened after softer-than-expected Producer Price Index (PPI) data for August and media reports pointing that officials keep the door open to such a cut. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near 100.50.
According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% has increased sharply to 69% from 34% a week ago. Apart from the Fed’s interest rate decision, investors will also focus on the dot plot and economic projections.
The Fed’s dot plot indicates where policymakers see the federal fund rate heading in the medium and long term. Traders see the Fed cutting interest rates by 100 bps to 4.25%-4.50% by year-end, suggesting that the central bank will opt for a large interest rate cut in one of three meetings remaining this year.
In Tuesday’s session, investors will pay close attention to the monthly US Retail Sales data for August, which will be published at 12:30 GMT. Economists estimate the Retail Sales to have grown by 0.2%, slower than the 1.0% increase in July. A slower increase in Retail Sales would indicate a soft inflation outlook.
EUR/USD gains further to near 1.1150. The major currency pair strengthened after retesting the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological support of 1.1000. The near-term outlook of the major currency pair has strengthened as the asset steadies above the 20-day Exponential Moving Average (EMA), which trades around 1.1060.
The 14-day Relative Strength Index (RSI) moves higher to near 60.00. A bullish momentum would trigger if it sustains above the aforementioned level.
Looking up, the high of 1.1155 from September 6 and the round-level resistance of 1.1200 will act as major barricades for the Euro bulls. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support zones.
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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