EUR/USD remains fragile as traders brace for ECB policy meeting
- EUR/USD stays below 1.0900 as the ECB is expected to cut its borrowing rates by 25 bps on Thursday.
- Increasing speculation for Donald Trump’s victory in the US presidential elections has dampened the Eurozone’s economic outlook.
- Fed’s Waller advised a gradual reduction of interest rates over the next year.
EUR/USD falls further to near 1.0880 in Wednesday’s European session. The major currency pair weakens as the Euro (EUR) underperforms on expectations that the European Central Bank (ECB) will cut interest rates again on Thursday.
The ECB is widely anticipated to reduce its Rate on Deposit Facility by 25 basis points (bps) to 3.25%. This would be the second straight interest rate cut by the ECB in a row. With strong confidence that the ECB will cut interest rates tomorrow, investors will pay close attention to the monetary policy statement and ECB President Christine Lagarde’s press conference to get fresh cues on the interest rate outlook.
The comments from Lagarde are expected to be dovish as price pressures in the Eurozone appear to be under control, and fears of an economic slowdown have grown significantly. According to the preliminary estimates, the Eurozone Harmonized Index of Consumer Prices (HICP) decelerated to 1.8% in September. Meanwhile, the second estimate for the monthly Consumer Price Index (CPI) (EU Norm) in France and Italy has shown that price pressures were slower than preliminary expectations.
Growing speculation about former US President Donald Trump winning the United States (US) presidential elections has also raised concerns over the European Union’s (EU) export outlook. Trump's victory is expected to result in tariff hikes on automotive imports to the US, which could dent exports from the old continent and lead to more weakness in economic growth.
Daily digest market movers: EUR/USD remains under pressure as US Dollar rises further
- EUR/USD faces pressure due to the US Dollar’s outperformance in the past few weeks. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its upside to near 103.40. The Greenback strengthens as traders see the US Federal Reserve (Fed) gradually reducing interest rates in the remainder of the year.
- The Fed is expected to shift to a ‘moderate’ policy-easing stance from ‘aggressive’ as fears of an economic slowdown have waned after Nonfarm Payrolls (NFP) and the US Services Purchasing Managers Index (PMI) grew strongly, with price pressures rising faster than expected in September.
- According to the CME FedWatch tool, traders are confident that the central bank will cut interest rates by 25 bps in November and December.
- On the contrary, Fed Governor Christopher Waller cautioned over interest rate cuts this week in a speech at Stanford University, citing that "Whatever happens in the near term, my baseline still calls for reducing the policy rate gradually over the next year," Reuters reported. When asked about the current status of the job market, Waller said, “The labor market remains healthy, even as labor demand is moderating.”
- Going forward, the next trigger for the US Dollar will be the monthly Retail Sales data for September, which will be published on Thursday. Economists expect the Retail Sales data to have grown by 0.3% after rising 0.1% in August.
Technical Analysis: EUR/USD trades close to 200-day EMA
EUR/USD trades cautiously below the key resistance of 1.0900 in the European trading hours. The major currency pair weakened after a breakdown of the Double Top formation on a daily timeframe on October 4, which resulted in a bearish reversal.
The shared currency pair wobbles near the 200-day Exponential Moving Average (EMA) around 1.0900. A bear cross, represented by the 20- and 50-day EMAs near 1.1020, suggests more weakness ahead.
The 14-day Relative Strength Index (RSI) dives to near 30.00, indicating a strong bearish momentum.
On the downside, the major could find support near the upward-sloping trendline at 1.0750, which is plotted from the October 3 low around 1.0450. Meanwhile, the psychological figure of 1.1000 will be the key resistance for the pair.
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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