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4 Jun 2024
EUR/USD clings to gains as US Dollar weakens, ECB policy in focus
- EUR/USD jumps above 1.0900 as the US Dollar weakens due to firm Fed rate-cut prospects.
- Traders raise Fed rate-cut bets amid fears of slower US economic growth.
- The ECB is due to announce June’s monetary policy decision on Thursday.
EUR/USD holds strength slightly above the round-level resistance of 1.0900 in Tuesday’s European session. Sheer strength in the major currency pair is driven by a sharp sell-off in the US Dollar (USD).
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slips to an almost two-month low near the crucial support of 104.00 as a weak United States (US) ISM Manufacturing PMI report for May deepens fears of slowing economic growth and eases risks of persistent inflation.
The report showed that the Manufacturing PMI, which gauges the health of factory activity, contracted for the second straight month. The economic data came in at 48.7, lower than the consensus of 49.6 and the prior reading of 49.2. Apart from that, the New Orders Index, which reflects the demand outlook, fell to 45.4 from the former reading of 49.1, suggesting sluggishness in the economy in the midst of the second quarter as the Federal Reserve (Fed) maintains a restrictive monetary policy.
Financial markets were already worried about slowing US economic strength as the Q1 Gross Domestic Product (GDP) growth was downwardly revised to 1.3% from the preliminary estimates of 1.6%.
Weak US factory data has boosted market expectations that the Fed will begin reducing interest rates from the September meeting. The CME FedWatch tool shows that the probability of a rate cut in the September meeting has increased to 60% from 45.8% a week ago.
Meanwhile, investors await the US ISM Services PMI, ADP Employment Change and the Nonfarm Payrolls (NFP) report for May and JOLTS Job Openings data for April. This slew of economic data will influence market speculation for Fed rate cuts in September.
Daily digest market movers: EUR/USD remains firm with focus on ECB policy
- EUR/USD exhibits strength due to a sharp decline in the US Dollar. The major event for the Euro will be the European Central Bank’s (ECB) interest rate decision, which will be announced on Thursday. As ECB policymakers have remained comfortable with expectations of opting for the first rate cut since 2019, investors are keen to know the interest rate outlook beyond the June meeting.
- Currently, financial markets expect that the ECB will reduce its key borrowing rates by 60 basis points (bps) this year that suggests two rate cuts, which were at least five at the beginning of the year. These expectations have waned due to a rebound in price pressures in May, stubborn service inflation and an improved economic outlook.
- May’s preliminary Eurozone Harmonized Index of Consumer Prices (HICP) report showed a higher-than-expected increase in annual price pressures. The report also showed that services inflation, which is driven by wage growth, rose by 4.1%, the most in seven months. Meanwhile, the Eurozone economy grew by 0.3% in 1Q, beating the estimates of 0.2%.
- The majority of ECB policymakers have been reluctant to offer a specific rate trajectory and have advised they will remain data-dependent.
Technical Analysis: EUR/USD rises above 1.0900
EUR/USD extends its upside to 1.0910, driven by strength due to the breakout from the Symmetrical Triangle formation on the daily time frame. The near-term outlook of the pair remains firm as the 50-day Exponential Moving Average (EMA) near 1.0800 is sloping higher.
The 14-period Relative Strength Index (RSI) has slipped into the 40.00-60.00 range, suggesting that the momentum, which leaned toward the upside, has faded for now.
The major currency pair is expected to extend its upside towards the March 21 high, around 1.0940, and the psychological resistance of 1.1000. However, a downside move below the 200-day EMA at 1.0800 could push it further down.
Euro FAQs
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.