EUR/USD rebounds as US Dollar ticks lower ahead of US inflation data
- EUR/USD recovers to near 1.0270 as the US Dollar performs subduedly as investors focus on the US PPI data for December.
- President-elect Donald Trump’s policies are expected to boost US inflation and growth.
- ECB’s Rehn sees monetary policy restrictions concluding by mid-summer.
EUR/USD extends its recovery from Monday’s over-two-year low of 1.0175 and trades near 1.0270 in Tuesday’s European session. The major currency pair rebounds as the US Dollar (USD) witnesses a marginal correction, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trading subduedly around 109.50.
However, the strong near-term trend in the US Dollar remains intact. According to the CME FedWatch tool, the 30-Day Fed Funds futures prices signal higher probabilities for only one interest rate cut from the Federal Reserve (Fed) this year, compared to two rate cuts shown by the dot plot at the latest Fed Summary of Economic Projections (SEP).
Traders have trimmed Fed dovish bets on the back of robust labor demand, as shown by the latest United States (US) Nonfarm Payrolls (NFP) data released on Friday, which signifies a strong economic outlook. Also, market participants expect inflationary pressures to remain stubborn under President-elect Donald Trump’s administration as incoming policies, such as immigration controls, tariff hikes, and lower taxes, will boost aggregate demand and growth.
For fresh cues on the current status of inflation, investors will focus on the US Consumer Price Index (CPI) data for December, which will be released on Wednesday.
In Tuesday’s session, investors will focus on the US Producer Price Index (PPI) data for December, which will be published at 13:30 GMT. Annual headline PPI is estimated to have accelerated to 3.4% from 3% in November. In the same period, the core PPI – which excludes volatile food and energy items – is expected to have grown by 3.7%, faster than the previous release of 3.4%.
Daily digest market movers: EUR/USD gains at US Dollar’s expense
- EUR/USD rebounds at the expense of the US Dollar. The outlook of the Euro (EUR) remains weak as European Central Bank (ECB) officials continue to support market expectations of further policy-easing, which have stemmed from a weak Eurozone economic outlook amid fears that US President-elect Donald Trump could slap hefty tariff hikes on the old continent, a scenario that could weaken the export sector.
- ECB policymaker and Bank of Finland Governor Olli Rehn said in a conference on Monday that he expects the monetary policy to leave the restrictive territory in the coming months, at the latest by “midsummer”. However, Rehn’s comments indicated he is not worried about the Trump trade. Rehn argued that firms would find ways to “circumvent” them and even a recent decline in direct trade between China and the US was masking such a trend, Reuters reported.
- Market participants expect the ECB to cut interest rates in each of their next four policy meetings, suggesting that the Deposit Facility rate will come down to 2%. Analysts at Barclays expect the Eurozone to start 2025 on a weak note, notably due to a “significant sluggishness“ in Germany’s manufacturing sector.
Technical Analysis: EUR/USD rebounds from a two-year low of 1.0175
EUR/USD bounces to near 1.0270 in Tuesday’s European session after refreshing its more-than-two-year low around 1.0175 on Monday. However, the outlook for the major currency pair is broadly bearish as the 20-week Exponential Moving Average (EMA) at 1.0585 is declining.
The 14-week Relative Strength Index (RSI) slides below 30.00, indicating a strong downside momentum.
Looking down, the pair could find support near the October 2022 high near 1.0100. Conversely, the January 6 high of 1.0437 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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