EUR/USD remains uncertain as ECB sets to cut rates further
- EUR/USD holds 1.0800, though its outlook remains uncertain on ECB dovish bets.
- The Eurozone's economic growth is expected to remain modest.
- The US Dollar will be influenced by market expectations for US presidential elections.
EUR/USD struggles to extend Friday’s recovery above the immediate resistance of 1.0870 and retraces back to 1.0850 in Monday’s European session. The major currency pair could retreat to its 11-week low near 1.0800 set on Thursday as investors expect the European Central Bank (ECB) to continue easing interest rates further.
With faltering Eurozone economic growth and the inflationary pressures below the bank’s target of 2%, investors expect the ECB to cut its borrowing rates again in December.
ECB policymaker and Estonian central bank Governor Madis Müller argued on Friday that the expectations of modest economic growth would probably tame price pressures further. The confidence of market participants for inflation remaining contained strengthened after the ECB’s own Survey of Professional Forecasters downwardly revised price growth to 1.9% for next year from 2% anticipated a quarter ago.
For more clarity on the interest rate outlook, investors will pay close attention to the two-day ECB President Christine Lagarde’s speech, starting on Tuesday. In her press conference after the central bank’s 25 basis points (bps) rate cut decision on Thursday, Lagarde didn’t offer a specific interest rate path and said decisions would be based on the incoming data.
Daily digest market movers: EUR/USD could resume its downside journey on US Dollar’s upbeat outlook
- EUR/USD will likely resume its downside journey as the US Dollar (USD) is expected to extend its upside after a minor technical correction on Friday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, posted a fresh 11-week high last week near 104.00 on multiple tailwinds.
- The outlook of the Greenback remains firm as traders are confident that the Federal Reserve (Fed) will pursue a gradual interest rate cut path. According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that the market expects 50 basis points (bps) decline in interest rates in the remaining year, suggesting that the Fed will cut its borrowing rates by 25 bps in November and December.
- Market expectations for the Fed opting for a less aggressive policy-easing cycle strengthened after a slew of United States (US) economic data for September pointed to economic resilience. For more cues on the economic outlook, investors will keep an eye on the preliminary S&P Global Purchasing Managers’ Index (PMI) data for October, which will be published on Thursday.
- Meanwhile, the fate of the US Dollar could be highly volatile as US presidential elections are around the corner. The latest national polls have shown Democratic candidate and US Vice President Kamala Harrish has the upper hand over Republican nominee and former US President Donald Trump.
Technical Analysis: EUR/USD strives to hold 1.0800
EUR/USD holds the immediate support of 1.0800 in European trading hours. However, the outlook of the major currency pair remains uncertain as it trades below the 200-day Exponential Moving Average (EMA), which trades around 1.0900.
The downside move in the shared currency pair started after a breakdown of a Double Top formation on a daily timeframe below the September 11 low at around 1.1000, which resulted in a bearish reversal.
The 14-day Relative Strength Index (RSI) dives below 30.00, indicating a strong bearish momentum. However, a recovery move remains on the cards as conditions turn oversold.
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 200-day EMA and 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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