EUR/USD ticks higher as traders brace for volatility ahead of French no-confidence vote
- EUR/USD gains slightly with investors focusing on political jitters in France as the no-confidence vote against the prime minister looms.
- ECB Holzmann supports a 25 bps interest rate cut in a policy meeting on December 12.
- Investors will also focus on US private employment and Services PMI data for November.
EUR/USD edges higher and holds the key support of 1.0500 in European trading hours on Wednesday. The major currency pair is broadly sideways as investors await the no-confidence motion by French far-right and left-wing parties against Prime Minister Michel Barnier. The vote has bolstered political uncertainty in the Eurozone’s second-largest nation due to the increasing chances that the French government will collapse, hurting the Euro (EUR).
Looking at the economic calendar, investors will also focus on the United States (US) ADP Employment Change and the ISM Services Purchasing Managers’ Index (PMI) data for November, which will be published in the North American session.
Economists expect the US private sector to have added fresh 150K jobs in November, significantly lower than 233K in October. In the same period, the Services PMI – which gauges activity in the services sector – is estimated to decline to 55.5 from the prior release of 56.0, suggesting a slowdown in growth.
The economic data will influence market expectations for the Federal Reserve’s (Fed) likely interest rate action in its monetary policy meeting on December 18. There is a 74% chance that the Fed will reduce its key borrowing rates by 25 basis points (bps) to 4.25%-4.50% and a 26% probability of rates being unchanged at the current levels, according to the CME FedWatch tool.
In Wednesday’s session, investors will also focus on the Fed’s Beige Book and Chair Jerome Powell’s speech for fresh interest rate guidance.
Meanwhile, a string of Fed officials have recently said that they see more interest rate cuts as appropriate as inflation continues to cool down. “I expect it will be appropriate to continue to move to a more neutral policy setting over time,” New York Fed President John Williams said on Monday. However, Williams didn’t provide any target for the Federal Funds Rate and said that the path would be data-dependent.
Ahead of the private sector employment and the service sector activity data, the US Dollar (USD) exhibits a muted trend. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles around 106.30.
The outlook of the US Dollar remains broadly positive as US President-elect Donald Trump threatened to impose 100% tariffs on BRICS. “The idea that the BRICS countries are trying to move away from the dollar while we stand by and watch is OVER,” Trump wrote in a social media post over the weekend.
Daily digest market movers: EUR/USD could remain edgy ahead of French no-confidence vote
- The French no-confidence debate is set to start at 15:00 GMT, and voting should happen around three hours later. Since Marine Le Pen announced on Monday that her party would vote to bring down the government, it would now require someone in the left-wing parties to shift position in order for Prime Minister Barnier to win the vote and avoid the fallout of the government.
- EUR/USD gains slightly as the US Dollar ticks down. Meanwhile, the outlook of the Euro (EUR) remains weak as European Central Bank (ECB) officials support more interest rate cuts. Traders expect the ECB to cut its key borrowing rates again in its monetary policy meeting on December 12 but are mixed about the likely interest-rate cut size.
- ECB policymaker and Governor of Austrian Central Bank Robert Holzmann said in an interview with Oberoesterreichische Nachrichten newspaper on Tuesday: “As the data currently stands, I think a reduction of 0.25 percentage points is conceivable, not more.”
- When asked about his views on the Eurozone’s inflation outlook, Holzmann said he sees risks to inflation skewed on the upside due to Trump’s tariffs policies. However, the extent of the effect will be based on how he will implement polcies.
- On the contrary, ECB board member Piero Cipollone said on Tuesday that US tariffs would weaken the economy, which translates into lower consumption and thus reduced pressure on prices.
Technical Analysis: EUR/USD consolidates around 1.0500
EUR/USD trades in a tight range near 1.0500 in Wednesday’s European session. The outlook of the major currency pair remains bearish as all short-to-long-term day EMAs are declining, pointing to a downside trend.
The 14-day Relative Strength Index (RSI) remains close to 40.00, suggesting that the bearish momentum has faded. However, the bearish trend has not been extinguished.
Looking down, the November 22 low of 1.0330 will be a key support for Euro bulls. On the flip side, the 50-day EMA near 1.0750 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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