EUR/USD touches fresh year-to-date low as traders brace for US inflation data
- EUR/USD remains vulnerable amid uncertainty over a potential trade war between the Eurozone and the US.
- ECB’s Rehn sees the Deposit Facility rate heading to the neutral rate in the first half of 2025.
- Investors await US inflation data and speeches from a slew of Fed officials.
EUR/USD extends its losing spell for the fourth trading day and touches a fresh year-to-date (YTD) low of 1.0592 during the European session on Wednesday amid caution ahead of the United States (US) Consumer Price Index (CPI) data for October, which will be published at 13:30 GMT.
The CPI report is expected to show that the annual headline inflation accelerated to 2.6% from 2.4% in September. The core CPI – which excludes volatile food and energy prices – rose steadily by 3.3%.
The inflation data will influence market expectations for the Federal Reserve’s (Fed) likely monetary policy action in December. The Fed is expected to cut interest rates again by 25 basis points (bps) to 4.25%-4.50% next month, according to the CME FedWatch tool. However, the likelihood has eased to 62% from 70% a week ago. Market expectations for a Fed interest rate cut in December have lately slightly faded as investors expect that the United States (US) economic outlook will improve and price pressures will escalate under President-elect Donald Trump’s administration.
Trump vowed to raise import tariffs by 10% and lower corporate taxes in his election campaign. This move will increase demand for domestic goods and boost labor demand and business investment, eventually prompting inflationary pressures and forcing the Fed to follow a more gradual rate-cut cycle.
On Tuesday, Minneapolis Federal Reserve Bank President Neel Kashkari cautioned at a Yahoo! Finance event, "If inflation surprises to the upside before December, that might give us pause.” Kashkari added that the monetary policy is "modestly restrictive right now," and expects economic growth to persist.
In Wednesday’s session, investors will also focus on speeches from a slew of Fed officials for fresh guidance on interest rates.
Daily digest market movers: EUR/USD remains under pressure on Euro’s underperformance
- Euro’s (EUR) underperformance from the past week across the board has also kept the major currency pair on the back foot. The Euro is downbeat due to multiple tailwinds, such as a potential trade war between the Eurozone and the US and the collapse of the German three-party government.
- On Tuesday, European Central Bank (ECB) Governing Council Member and Bank of Finland Governor Olli Rehn suggested that Europe should position itself better ahead of Trump’s second term. "If a trade war were to start, Europe must not be unprepared,” Rehn said. A trade war between both sides of the Atlantic looks likely, as Trump mentioned in his election campaign that the euro bloc will "pay a big price" for not buying enough American exports.
- When asked about his views on the ECB interest rate outlook, Rehn commented that the Deposit Rate could decline to the so-called neutral rate in the first half of 2025, Reuters reported. According to the ECB staff, the neutral rate is around 2% or 2.25%.
- Meanwhile, the collapse of the German three-party coalition after Chancellor Olaf Scholz sacked Finance Minister Christian Linder last week has also been a major cause of weakness in the Euro. According to a Focus Online report, German Olaf will call a confidence vote on December 18 and the snap election on February 23.
- Going forward, investors will focus on ECB President Christine Lagarde’s speech for fresh interest rate guidance, which is scheduled for Thursday.
Technical Analysis: EUR/USD remains weak near YTD lows around 1.0600
EUR/USD hovers near the fresh year-to-date low around 1.0600 in European trading hours on Wednesday. The major currency pair is expected to face more downside, with the 20-day Exponential Moving Average (EMA) turning vertically south near 1.0800.
The return of the 14-day Relative Strength Index (RSI) in the range of 20.00-40.00 indicates bearish momentum gaining traction and adds to evidence of more downside.
Looking down, the pair could decline to near the psychological support of 1.0500 after breaking below 1.0600. On the flip side, the round-level resistance of 1.0700 will be the key barrier for the Euro bulls.
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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