EUR/USD consolidates ahead of Fed Powell’s testimony
- EUR/USD is broadly sideways around 1.0300, with investors focusing on Fed Chair Jerome Powell’s testimony before Congress.
- US President Trump imposed 25% tariffs on imports of steel and aluminum from all nations.
- The Eurozone is expected to be the major casualty of Trump’s reciprocal tariffs.
EUR/USD ticks higher but is broadly sideways around 1.0300 in Tuesday’s European trading session as investors await the Federal Reserve (Fed) Chair Jerome Powell’s testimony before Congress at 15:00 GMT. Investors will pay close attention to Powell’s comments to know for how long the Fed will keep interest rates steady in the range of 4.25%-4.50% and the likely impact of 25% tariffs on all steel and aluminum imports on the monetary policy outlook.
In January, the Fed left interest rates unchanged and Powell said that the central bank will remain in the waiting mode until it sees “real progress in inflation or at least some weakness in labor market”.
On Monday, United States (US) President Donald Trump signed executive orders of a 25% levy on imports of steel and aluminum from all nations, which will come into effect on March 12. Trump also said that there will be reciprocal tariffs over nations where he sees unfair trade practices in the coming days. The US President has outlined tariffs on metals to boost local production and reduce dependence on other nations.
Market participants are concerned over Trump’s international agenda, which is expected to result in a global trade war and high inflation in the US economy.
For fresh cues on inflation, investors will focus on the US Consumer Price Index (CPI) data for January, which will be released on Wednesday at 13:30 GMT. Economists expect the annual core CPI – which excludes volatile food and energy prices – to have grown at a slower pace of 3.1%, compared to a 3.2% increase in December. In the same period, the headline inflation is estimated to have remained steady at 2.9%.
Daily digest market movers: EUR/USD ticks higher as Euro gains
- EUR/USD edges higher as the Euro (EUR) outperforms its major peers, even though market participants expect Trump’s reciprocal tariffs will be unfavorable for the Eurozone. The impact of reciprocal tariffs is expected to be severe on the Eurozone as it charges 10% levies on automobile imports from the US and pays 2.5% import duty for domestic autos supplied to them. Such a scenario will be unfavorable for the Euro as lower sales would result in economic contraction.
- The outlook of the Euro is also vulnerable on the monetary policy front given the possibility that the rate differential between the European Central Bank (ECB) and the Fed could widen. Traders have fully priced in three interest rate cuts by the ECB and see them coming by the summer. Firm dovish bets are based on expectations that inflationary pressures are expected to return sustainably to near the central bank’s target of 2%.
- Three interest rate cuts by the ECB of 25 basis points (bps) would push the Deposit Facility rate lower to 2%, a figure that is close to the neutral rate, as projected by economists at the ECB.
- Contrary to market expectations, ECB policymaker and Governor of the Bank of Portugal Mario Centeno expects that the central bank could go “below the neutral rate” as the Eurozone economy is not “strong enough to support inflation at 2%”.
Technical Analysis: EUR/USD oscillates inside Monday’s trading range
EUR/USD trades inside Monday’s trading range around 1.0300 in Tuesday’s European session. The outlook of the major currency pair remains bearish as the 50-day Exponential Moving Average (EMA) around 1.0430 continues to be a major barricade for the Euro bulls.
The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating a sideways trend.
Looking down, the January 13 low of 1.0177 and the round-level support of 1.0100 will act as major support zones for the pair. Conversely, the psychological resistance of 1.0500 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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