EUR/USD struggles to hold onto recovery as US Dollar bounces back
- EUR/USD faces pressure after rebounding to near 1.0500 as the US Dollar bounces back.
- The US Dollar rebounds as investors digest Trump’s pick of Scott Bessent as Treasury Secretary.
- ECB Lane warned that US tariffs could lead to a big disruption in the Eurozone.
EUR/USD faces selling pressure near the psychological resistance of 1.0500 in Monday’s European session after a solid opening that lost some steam as the US Dollar (USD) attempts to rebound. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, broadly consolidates at around 107.00 as investors digest the selection of fund manager Scott Bessent for the role of Treasury Secretary by President-elect Donald Trump.
The Greenback fell sharply early in the Asian session, as did 10-year US Treasury yields, in a warm welcome by bond markets given Bessent’s old relation with Wall Street. Still, this initial reaction appears to be short-lived as the US Dollar swings between mild gains and losses.
In an interview with the Wall Street Journal (WSJ) after his nomination for Treasury Secretary over the weekend, Bessent said that he will focus on enacting tariffs, eliminating tax cuts on social security benefits and overtime wages, and maintaining the US Dollar’s status as the world's reserve currency.
Meanwhile, the improved economic outlook in the United States (US) is expected to support the resumption of the US Dollar’s uptrend. According to PMI data released on Friday, overall business activity in the US expanded in November at the fastest pace in 31 months. The data signaled robust growth in the service sector activity and a minor contraction in the manufacturing sector’s output.
This week, investors will focus on the Personal Consumption Expenditure Price Index (PCE) data for October, which will be published on Wednesday. The inflation data will influence market speculation for the Federal Reserve’s (Fed) likely interest rate action in the December meeting. According to the CME FedWatch tool, there is a 56% chance that the Fed will cut interest rates by 25 basis points (bps) to 4.25%-4.50%, while the rest favors leaving rates unchanged.
Daily digest market movers: EUR/USD stays under pressure as ECB officials worry about Eurozone growth
- EUR/USD is expected to remain on the back foot as investors expect Scott Bessent’s selection for the role of Treasury Secretary has set the stage for tariff hikes, a move that would prompt a global trade war. Higher import tariffs by the US will adversely impact the already vulnerable Eurozone economy by dampening its export sector.
- Speaking to Les Echos on Monday, European Central Bank (ECB) Chief Economist Philip Lane said that the risk of a big disruption to the Eurozone is very high if the US government enacts a rapid and universal tariff regime, according to Mace News. Last week, Lane warned that a global trade war due to the likely implementation of President-elect Donald Trump’s higher tariffs would result in a “sizeable” loss in global economic output. "Trade fragmentation entails sizeable output losses,” Lane added.
- When asked about his outlook on interest rates, Lane said: “A lot of the final leg of bringing inflation to target could be covered next year; after that restrictive policy will not be needed.”
- The German IFO Business Sentiment index data came in mixed in November. The data showed that German businesses’ morale deteriorated slightly over the month, although the index gauging expectations came in slightly better than what economists had expected.
- Friday’s Flash HCOB Composite PMI data for November showed that the European Union (EU) is going through a rough phase. The Composite PMI unexpectedly declined as the service sector output came in below the 50.0 threshold, a figure that separates expansion from contraction. The manufacturing sector activity contracted further. The report showed that New Orders decreased for the sixth straight month running. a, “The environment in November is stagflationary,” analysts at S&P Global said.
Technical Analysis: EUR/USD finds interim support near 1.0330
EUR/USD struggles to hold its recovery to near 1.0500 seen on Monday’s opening as the broader outlook for the pair remains bearish. All short-to-long-term day Exponential Moving Averages (EMAs) are declining, pointing to a downside trend.
The 14-day Relative Strength Index (RSI) rebounded after reaching oversold territory. However, the momentum oscillator has cooled down, which could allow bears to take the charge again.
Looking down, the November 22 low of 1.0330 will be a key support for Euro bulls. On the flip side, the November 20 high round 1.0600 emerges as the first resistance.
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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