EUR/USD bounces back as US Dollar gives up gains
- EUR/USD rebounds and returns to near 1.0500 as the US Dollar resumes its corrective trend triggered after Trump nominated Bessent for US Treasury Secretary.
- ECB policymakers support reducing interest rates gradually to abate risks of inflation becoming persistent.
- This week, investors will focus on US PCE inflation for October and Eurozone flash HICP data for November.
EUR/USD recovers intraday losses and rebounds to near the psychological resistance of 1.0500 in Tuesday’s European session. The major currency pair bounces back after a weak opening as the US Dollar (USD) surrenders most of its daily gains.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, started strongly and raised to near 107.50 in the early Asian session but surrenders most of its gains and falls to near 107.00 during the European trading hours.
Renewed fears boosted the US Dollar’s (USD) appeal in Tuesday’s Asian session after President-elect Donald Trump threatened to raise tariffs on other North American economies from where he expects China to have poured illicit drugs into the United States (US). Trump said he would impose 25% tariffs on Mexico and Canada and an additional 10% on China to the 60% already mentioned in his election campaign.
The US Dollar resumes its corrective trend, which started on Monday after Trump nominated seasoned hedge fund manager Scott Bessent for the role of Treasury Secretary. The USD fell sharply as investors anticipated Bessent to fulfill the economic agenda by maintaining fiscal discipline and political steadiness.
Going forward, investors will focus on the Federal Open Market Committee (FOMC) Minutes for the monetary policy meeting on November 7, which will be published at 19:00 GMT. In the November policy meeting, the Fed reduced its key borrowing rates by 25 basis points (bps) to the 4.50%-4.75% range.
This week, investors will also focus on the US Personal Consumption Expenditure Price Index (PCE) data for October, which will be released on Wednesday. The inflation data will influence market speculation for the Federal Reserve (Fed) interest rate action in the December meeting. Traders are divided over whether the Fed will cut interest rates by 25 bps or leave them at their current levels next month, according to the CME FedWatch tool.
Daily digest market movers: EUR/USD bounces back despite multiple headwinds
- EUR/USD manages to recover intraday losses on Tuesday. Still, investors expect the major currency pair to remain on the backfoot as European Central Bank (ECB) policymaker and President of Bundesbank Joachin Nagel cited concerns over economic weakness in the Eurozone’s largest economy, Germany, in his speech on Monday, Reuters reported.
- "Germany is stuck in a period of economic weakness which has now lasted two and a half years," Nagel said. He added, "Stagnation is likely in the final quarter of this year," and warned that the economy could fall behind other nations of the bloc.
- Despite citing fears over growth, Nagel supported gradually reducing interest rates to ensure inflationary pressures get fully tamed. "It is important to remain cautious and to loosen monetary policy only gradually and not too quickly," Nagel said.
- Also, ECB Chief Economist Philip Lane praised the bank’s gradual policy-easing action in an interview with French newspaper Les Echos on Monday. Lane said that inflation is still higher than where the ECB wants it to be as a major decline in price pressures has come from moderation in energy costs, while inflation in the services sector is still too high.
- To know the current status of inflation in the Eurozone and its major economies, investors will focus on the flash Harmonized Index of Consumer Prices (HICP) data for November, which will be published on Thursday and Friday. Economists expect the Eurozone’s headline and core HICP – which excludes volatile components like food, energy, tobacco, and alcohol – to have accelerated to 2.4% and 2.9%, respectively, on year.
Technical Analysis: EUR/USD holds key support of 1.0330
EUR/USD regains strength and bounces back to near 1.0500 in Tuesday’s European session. The major currency pair continues to hold the near-term low of 1.0330. However, the outlook remains bearish as all short-to-long-term Exponential Moving Averages (EMAs) in the daily chart are declining, pointing to a downside trend.
The 14-day Relative Strength Index (RSI) rebounded after conditions turned oversold. However, the oscillator has cooled down, which could allow bears to take charge again.
Looking down, the November 22 low of 1.0330 will be the key support. On the flip side, the November 20 high round 1.0600 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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