EUR/USD is on the rise as traders opt for profit-taking following last week’s volatile sell-off. The divergence in perspectives between speakers from the Federal Reserve and the European Central Bank suggests the potential for future weakness. The primary release impacting the pair today is US Durable Goods Orders.
EUR/USD is trading slightly higher on Tuesday, hovering in the 1.0800s, as part of a broader trend of US dollar selling. Both the US Dollar Index (DXY) and the US 10-year note yield are experiencing declines. The pair has surpassed key moving averages, including the 50-day and 200-day Simple Moving Averages (SMA), rebounding from previous lows.
The bounce in EUR/USD appears to be driven by profit-taking rather than specific fundamental catalysts. Despite a minor dip in US new home sales data, the overall economic outlook for the US remains strong, with inflation staying elevated. This suggests the Federal Reserve may not rush to cut interest rates, which typically strengthens the greenback by attracting more foreign capital.
Recent commentary from Fed officials has been generally hawkish, advocating for a delay in rate cuts. Conversely, ECB officials have struck a more dovish tone, hinting at earlier-than-expected rate cuts. This divergence in central bank stances could impact EUR/USD.
US Durable Goods Orders for February will provide further insights into the US economy today. Any significant deviation from expectations could influence the pair’s movement. Additionally, ECB officials’ comments on potential rate cuts may sway market sentiment regarding the euro.
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From a technical standpoint, EUR/USD appears to be in a short-term downtrend, with a potential downside continuation signaled by a break below key support levels. However, a move above certain resistance levels could challenge this downtrend.
In summary, EUR/USD is experiencing a recovery phase driven by profit-taking, with market sentiment influenced by central bank perspectives and economic data releases.
ECB FAQS
What is the ECB and how does it influence 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 for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
What is Quantitative Easing (QE) and how does it affect the Euro?
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
What is Quantitative tightening (QT) and how does it affect the Euro?
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.