EUR/USD resumes decline as Trump victory keeps US Dollar upbeat outlook intact
- EUR/USD faces significant offers near 1.0800 as the US Dollar resumes its upside trend.
- Trump’s victory has improved the US Dollar’s long-term outlook.
- The Euro is down amid Trump tariffs’ threats, German political uncertainty, and doubts over the Eurozone economic outlook.
EUR/USD faces selling pressure near the key resistance of 1.0800 in European trading hours on Friday. The major currency pair fails to extend Thursday’s recovery as the US Dollar (USD) resumes its upside journey after a sharp correction.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, bounces back to nearly 104.65. The index had retraced to nearly 104.20 on Thursday following the more than four-month high of 105.50 registered after Donald Trump won the presidential election in the United States (US).
The reasoning behind the US Dollar’s recovery can be attributed to the victory of Trump, who vowed to raise import tariffs by 10% and lower corporate taxes in his election campaign. Market experts suggest that Trump’s fiscal policy, if implemented, would result in higher investment, spending and labor demand, which will elevate upside risks to inflation and force the Federal Reserve (Fed) to opt for a restrictive monetary policy stance.
Fed Chair Jerome Powell said on Thursday that he doesn’t see any near-term effect of Trump’s return to the White House regarding the central bank’s policy decisions. “We don’t guess, speculate and we don’t assume what future government policy choices will be,” Powell said after the bank decided to cut interest rates by 25 basis points (bps) to 4.50%-4.75%, as expected.
When asked about the interest rate path ahead, Powell sounded confident about the continuation of the policy-easing cycle by saying he is optimistic about inflation remaining on track to the bank’s target of 2% with some softness in labor market conditions.
Daily digest market movers: EUR/USD drops as US Dollar bounces back
- EUR/USD is also facing sharp selling pressure due to the Euro’s (EUR) underperformance against its major peers, except for Asia-Pacific currencies. The Euro is down as investors are worried about the Eurozone economic outlook due to Trump’s victory, the dissolution of Germany’s three-party coalition, and growing risks of inflation remaining below the European Central Bank’s (ECB) target of 2%.
- Higher tariffs by the US would strain the Eurozone’s export sector, likely hitting economic growth. “Uncertainty is high on many levels, from the exact impact of US tariffs to the timing of their implementation to how and when Europe responds,” Deutsche Bank analysts said.
- Meanwhile, the Deutsche Bank also sees the ECB’s Deposit Facility rate heading to 1.5%, down from the 2.25% previously projected, due to weakening macroeconomic conditions and inflation risks falling below target.
- The collapse of the German coalition after Chancellor Olaf Scholz dismissed Federal Minister of Finance Christian Lindner has paved the way for snap elections in early 2025. The scenario of political uncertainty limits the growth potential of an economy due to the postponement of fiscal spending by the government.
Technical Analysis: EUR/USD retreats from 1.0800
EUR/USD resumes decline after a short-lived recovery to near 1.0800 in Friday’s European session. The near-term trend of the major currency pair remains bearish as the 20-day and 50-day Exponential Moving Averages (EMAs) near 1.0860 and 1.0920, respectively, continue to decline.
The 14-day Relative Strength Index (RSI) wobbles near 40.00. A bearish momentum would resume if the RSI (14) slides below the above-mentioned level.
The upward-sloping trendline, plotted from the April 16 low of around 1.0600, will act as a key resistance zone for Euro bulls around 1.0800. Looking down, the shared currency pair could decline to the year-to-date (YTD) low of 1.0600
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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