EUR/USD gains as Fed outsize rate cut bets surge
- EUR/USD extends last week’s gains near 1.1120 as rising bets for Fed large rate cuts weigh on the US Dollar.
- Soft US PPI and deepening concerns over labor market outlook prompt Fed jumbo rate cut bets.
- The ECB is expected to cut interest rates once again in the last quarter of the year.
EUR/USD extends last week’s gains near 1.1120 in Monday’s European session. The major currency pair rises as growing speculation for the US Federal Reserve (Fed) to begin the policy-easing cycle aggressively on Wednesday has weighed on the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides sharply to near 100.70.
According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to the 4.75%-5.00% range in September has increased sharply to 61% from 30% a week ago.
Market expectations for the Fed reducing interest rates by 50 bps have increased significantly as the United States (US) annual Producer Price Index (PPI) data for August came in sharply lower than expected on Thursday.
The headline producer inflation rose at a slower pace of 1.7% year-over-year (YoY) from the estimates of 1.8% and July’s reading of 2.1%. Generally, a sharp slowdown in producer inflation results from growing worries over the demand outlook, which happens due to the weak purchasing power of households in a high-interest rate environment.
Meanwhile, market experts believe that the Fed will start reducing interest rates in Wednesday’s meeting as officials are worried about deteriorating labor market conditions, with growing confidence that inflationary pressures will sustainably return to the central bank’s target of 2%.
Ahead of the Fed monetary policy decision, investors will focus on the US Retail Sales data for August, which will be published on Tuesday. Retail Sales are estimated to have grown at a slower pace of 0.2% from 1% in July.
Daily digest market movers: EUR/USD moves higher amid weakness in US Dollar
- EUR/USD gains at the US Dollar’s expense. The Euro (EUR) exhibits a mixed performance against its major peers amid uncertainty over the European Central Bank’s (ECB) interest rate cut path. The ECB reduced its Rate on Deposit Facility again by 25 basis points (bps) to 3.50% on Thursday, as expected, but stepped back from providing a pre-defined rate-cut path.
- ECB President Christine Lagarde said at the press conference, "The interest rate decisions will be based on its assessment of inflation outlook in light of incoming economic and financial data, dynamics of underlying inflation and strength of monetary policy transmission."
- After the monetary policy announcement, commentaries from ECB officials have added to confidence that the bank’s battle against Eurozone inflation appears to be in the final leg. ECB Governing Council member and Bundesbank President Joachim Nagel said on Friday, "The inflation picture looks very good." Nagel added, "we are now assuming, and the data has shown, that we will reach our inflation target of 2% by the end of the next year."
- Currently, financial market participants expect that the ECB will cut interest rates one more time in the last quarter of the year due to deepening worries over the German economic outlook. Analysts at Nomura said, “The way we think about Germany is that plentiful structural concerns – ranging from the country's greater exposure to China and the global manufacturing cycle, the energy price ‘sticker shock’ still reverberating through the economy, and poor demographic trends (falling population, a rising dependency ratio) – have lowered the bar for any given cyclical downturn to result in recession.”
Technical Analysis: EUR/USD jumps to near 1.1120
EUR/USD extends its upside to near 1.1120 on Monday. The major currency pair strengthened after retesting the breakout of the Rising Channel chart pattern formed on a daily timeframe near the psychological support of 1.1000. The near-term outlook has strengthened as the pair 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 after breaking the above-mentioned level.
Looking up, last week’s high of 1.1155 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.
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.
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