EUR/USD remains vulnerable near 1.0940 ahead of US Inflation
- EUR/USD faces selling pressure as the US Dollar holds onto gains ahead of the US CPI data for September.
- Fed officials are highly concerned about reviving job growth.
- The Euro is under pressure as the ECB is expected to reduce interest rates further by 50 bps by the year-end.
EUR/USD exhibits a weak performance in Thursday’s European session after diving below the key support of 1.0950 on Wednesday. The major currency pair remains under pressure as the US Dollar (USD) clings to gains ahead of the United States (US) Consumer Price Index (CPI) data for September, which will be published at 12:30 GMT.
The US Dollar Index (DXY), which tracks the Greenbacks value against six major currencies, trades close to a fresh seven-week high near 103.00.
Economists expect the annual core CPI – which excludes volatile food and energy prices – to have grown steadily by 3.2%. Annual headline CPI is expected to have decelerated to 2.3% from 2.5% in August. The month-on-month headline and core CPI are expected to have grown at a slower pace of 0.1% and 0.2%, respectively.
The impact of the inflation data on market expectations for the Federal Reserve (Fed) interest rate outlook is expected to be moderate as recent commentaries from Fed officials have indicated that they are confident about price pressures remaining on track to return sustainably to the bank’s target of 2%. Fed policymakers are highly focused on reviving labor demand due to which they unanimously voted for a larger-than-usual rate cut size of 50 basis points (bps) in the September policy meeting.
However, the scenario of blowout inflation figures could renew risks of inflation remaining persistent and negatively influence market expectations of two more interest rates in the remaining year.
Daily digest market movers: EUR/USD weakens as ECB rate cut bets swell
- EUR/USD remains vulnerable near a fresh eight-week low of 1.0940 due to multiple headwinds. Apart from the firm US Dollar, the Euro’s (EUR) underperformance against its major peers due to escalating European Central Bank (ECB) dovish bets has also kept the shared currency pair on the backfoot.
- A majority of ECB officials have argued in favor of reducing interest rates further as risks of inflation remaining persistent in the Eurozone have significantly eased after the September flash annual Harmonized Index of Consumer Prices (HICP) report decelerated to 1.8%, the lowest since April 2021. Also, growing risks to economic growth have allowed traders to price in a 25-bps interest rate cut in each of the remaining two meetings this year.
- German economic ministry said on Wednesday that they are expecting the economy to end the year with a 0.2% decline in the overall output. Earlier, the economic ministry projected a 0.3% growth but was forced to revise forecasts due to structural problems and geopolitical issues. Being the largest nation in the Eurozone, the impact of a de-growth in the German economy would be high on the Euro.
- On the economic front, annual German Retail Sales, a key measure of consumer spending that prompts inflationary pressures, expanded at a robust pace of 2.1% in August after contracting by 1.6% in July. On month-on-month, the consumer spending measure rose at a faster pace of 1.6% from 1.5% in July.
Technical Analysis: EUR/USD trades close to fresh eight-week low below 1.0940
EUR/USD extends its downside to near 1.0935 after failing to hold the key support of 1.0950. The major currency pair weakened after it 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.
Looking down, the pair is expected to find support near the 200-day EMA around 1.0900. On the upside, the September 11 low of 1.1000 and the 20-day EMA at 1.1090 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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