EUR/USD advances as US Dollar slumps ahead of US NFP
- EUR/USD climbs above 1.0850 as the US Dollar underperforms ahead of the US NFP data release for February.
- US President Trump announced exemptions on more products imported from Canada and Mexico.
- German debt reforms have forced traders to pare ECB dovish bets.
EUR/USD jumps above 1.0850 in Friday’s European session and revisits a four-month high. The major currency pair exhibits strength as the US Dollar (USD) weakens ahead of the United States (US) Nonfarm Payrolls (NFP) data for February, which will be published at 13:30 GMT. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its losing streak for the fifth trading day and slumps to a four-month low of around 103.60.
The Greenback has remained on the backfoot as investors have become increasingly concerned over the United States (US) economic outlook due to uncertainty over President Donald Trump’s tariff agenda. Market participants believe that the pressure of higher tariffs will be borne by US importers, who would pass on the impact to consumers. Such a scenario would diminish their purchasing power and, eventually, the domestic demand.
On Thursday, Trump announced tariff relaxations on a number of products, which come under the purview of the United States-Mexico-Canada Agreement (USMCA) until April 2, the same day when he is expected to introduce reciprocal tariffs. The US President imposed 25% levies on Canada and Mexico on Tuesday but provided a one-month exemption on automobiles after discussing with the big three US carmakers on Wednesday.
The US NFP report is expected to show that the economy added 160K fresh workers, higher than the 143K recorded in January. The Unemployment Rate is seen steady at 4%. Meanwhile, Average Hourly Earnings, a key measure of wage growth, is anticipated to have risen steadily by 4.1% year-on-year. Month-on-month wage growth measure is estimated to have grown at a slower pace of 0.3%, compared to 0.5% in January. The official labor market data will significantly influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
Daily digest market movers: EUR/USD strengthens as traders reassess ECB dovish bets on German debt reforms
- Strength in the EUR/USD pair is also driven by the Euro’s (EUR) outperformance on diminishing European Central Bank (ECB) dovish bets due to German debt reforms. Market participants believe that the confirmation of creating a 500 billion Euro (EUR) infrastructure fund and reforms in the so-called “debt brake” by German officials will be inflationary for the economy. Such a scenario would force the ECB to slow down the pace of the monetary expansion cycle.
- However, ECB President Christine Lagarde refrained from gauging the impact of German debt reforms in the press conference after the interest rate decision on Thursday and said the increased defense and infrastructure spending is still a "work in progress" and the ECB "needs time" to understand the impact.
- Traders have revised downward their expectations for the ECB’s monetary policy outlook and think that the central bank could pause the interest rate cut cycle in April after easing five times in a row. Before the monetary policy meeting on Thursday, traders had fully priced in two more interest rate cuts by the summer.
- Christine Lagarde didn’t provide a specific rate-cut plan and reiterated that the central bank remains “data-dependent” and decisions on rates will be made on a “meeting-by-meeting basis" after the ECB reduced the Deposit Facility rate by 25 basis points (bps) to 2.5%, as expected. Lagarde guided that risks to economic growth remain tilted to the “downside” and Trump’s tariff war could weigh on the Eurozone economy further.
- The next major trigger for the Euro is discussions over boosting defense and infrastructure spending as well as sweeping changes to state borrowing rules at Germany's lower house of parliament from March 13. The Bundestag (German parliament) lower house will vote on the "debt brake" reforms on March 18, Reuters reported.
Technical Analysis: EUR/USD rallies above 1.0850
EUR/USD surges to over 1.0850 on Friday after a decisive breakout above the December 6 high of 1.0630 earlier this week. The long-term outlook of the major currency pair is bullish as it holds above the 200-day Exponential Moving Average (EMA), which trades around 1.0640.
The 14-day Relative Strength Index (RSI) jumps above 70.00, indicating a strong bullish momentum.
Looking down, the December 6 high of 1.0630 will act as the major support zone for the pair. Conversely, the November 6 high of 1.0937 and the psychological level of 1.1000 will be key barriers for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 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.