EUR/USD is edging upwards as traders seize the opportunity to cash in profits following last week’s turbulent sell-off. The divergence in the views expressed by speakers from the Federal Reserve and the European Central Bank suggests the possibility of future weakness. On Tuesday, the main event for the pair is the release of US Durable Goods Orders.
The pair is trading slightly above the mid-1.0800s on Tuesday, in line with a broader decline in the US Dollar (USD). The US Dollar Index (DXY) and the closely correlated US 10-year Note yield are also trading lower.
EUR/USD has climbed above the critical 50-day and 200-day Simple Moving Averages (SMA), rebounding from last week’s lows of around 1.0801.
The bounce in EUR/USD is driven more by profit-taking rather than specific fundamental factors. Although US New Home Sales data released on Monday showed a slight decline, the overall economic outlook suggests that the US economy continues to perform well, with inflation remaining elevated. This indicates that the Federal Reserve may not rush to cut interest rates, which is typically positive for the US Dollar.
On Monday, comments from Fed officials were generally hawkish, indicating a reluctance to cut interest rates too quickly. Federal Reserve Bank of Atlanta President Raphael Bostic said the Fed would likely only cut rates once in 2024, contrary to the official stance advocating for three cuts. Federal Reserve Governor Lisa Cook also urged a cautious approach to easing monetary policy.
In contrast, ECB officials struck a more dovish tone on Monday, with some suggesting the possibility of earlier interest rate cuts. ECB Member Fabio Panetta indicated consensus for a rate cut as inflation falls to target. At the same time, ECB Chief Economist Philip Lane expressed confidence that wage inflation would fall in line with the ECB’s target.
While the widening gap between the views of Fed and ECB officials could theoretically push EUR/USD lower, last week’s sell-off may have already priced in this divergence.
From a technical perspective, EUR/USD is seen pulling back in a short-term downtrend, with a continuation of weakness expected if it decisively breaks below crucial support levels. Alternatively, a move above certain resistance levels could question the validity of the short-term downtrend.
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.
