EUR/USD walks on thin rope near 1.0950 ahead of FOMC Minutes, US inflation
- EUR/USD struggles to sustain above 1.0950 as the US Dollar performs strongly ahead of the FOMC Minutes.
- Traders have priced out Fed large rate cut bets for November.
- The ECB is expected to reduce interest rates by 50 bps in the last quarter of the year.
EUR/USD skates on thin ice near the eight-week low of 1.0950 in Wednesday’s European session. The major currency pair stays under pressure as the US Dollar (USD) gathers strength to extend its previous week’s rally further, with the US Dollar Index (DXY) hovering near a seven-week high around 102.60.
The appeal of the US Dollar has strengthened as traders have priced out expectations for the Federal Reserve (Fed) to reduce interest rates again by 50 basis points (bps) in November. Traders were forced to unwind Fed large rate cut bets as the upbeat United States (US) Nonfarm Payrolls (NFP) report for September diminished downside risks to economic growth and consumer spending. Also, dismal market sentiment due to Middle East tensions has improved the Greenback’s appeal as a safe haven.
Financial market participants expect the Fed to cut interest rates by 25 bps in the remaining two policy meetings this year at the time of writing, according to the CME FedWatch tool.
In Wednesday’s session, investors will pay close attention to the Federal Open Market Committee (FOMC) Minutes of the September meeting, which will be released at 18:00 GMT. The FOMC Minutes will convey the views of all officials on the interest rate and the economic outlook. In the September meeting, all members unanimously voted to start the policy-easing cycle with a 50-bps rate cut, except Fed Governor Michelle Bowman who favored a smaller reduction of 25 bps.
Going forward, the major trigger for the US Dollar will be the US Consumer Price Index (CPI) and the Producer Price Index (PPI) data for September, which will be published on Thursday and Friday, respectively.
Daily digest market movers: EUR/USD sees more downside amid firm US Dollar
- The Euro (EUR) faces selling pressure as traders have priced in more rate cuts by the European Central Bank (ECB). The ECB is expected to cut its Deposit Facility Rate further by 50 bps to 3% by the year-end, suggesting that there will be a rate cut of 25 bps in each of the two policy meetings scheduled for next week and in December.
- The ECB has already reduced its key borrowing rates by 50 bps this year as officials have remained confident that inflation will return to the bank’s target of 2% in 2025. Market expectations for the ECB to cut interest rates further have been prompted by the declining trend in price pressures and the economic vulnerability in the Eurozone.
- ECB policymaker and Governor of the Greek Central Bank Yannis Stournaras has also backed two more rate cuts in each of the remaining meetings this year and emphasized the need to reduce them further in 2025 as inflation continues to decelerate, in his comments in an interview with Financial Times published on Wednesday. His comments also indicated that price pressures are declining faster than what the ECB forecasted in September.
Technical Analysis: EUR/USD remains below 1.1000
EUR/USD struggles to gain ground near the immediate support of 1.0950. The major currency pair stays on the backfoot as it has delivered a breakdown of the Double Top chart pattern formation on a daily timeframe. The above-mentioned chart pattern was triggered after the shared currency pair broke below the September 11 low of 1.1000.
The 14-day Relative Strength Index (RSI) settles inside the bearish range of 20.00-40.00, suggesting more weakness ahead for EUR/USD.
Looking down, the pair is expected to find support near the 200-day EMA around 1.0900. On the upside, the 20-day EMA at 1.1090 and the September high around 1.1200 will be major resistance zones.
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.
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