EUR/USD trades with caution as investors look for German coalition talks
- EUR/USD remains on its toes around 1.0450 as investors expect the new German coalition government won’t be able to revive economic growth.
- The leader of CDU Frederich Merz is unlikely to join hands with Far-Right.
- US President Trump confirms that the plan of imposing 25% tariffs on Canada and Mexico is still on.
EUR/USD trades cautiously above the key support of 1.0450 in European trading hours on Tuesday. The major currency pair wobbles as investors await the outcome of the victorious Frederich Merz-led-conservatives’ negotiations with other parties to form a coalition government.
The leader of the Christian Democratic Union of Germany (CDU) Frederich Merz – likely the next German Chancellor – is expected to face heated negotiations to fulfill his economic agenda of loosening the ‘debt brake’ rule to increase the limit of the budget deficit, which is currently 0.35% of the Gross Domestic Product (GDP). The most likely scenario is Conservatives forming a coalition government with the Social Democratic Party (SPD) of current Chancellor Olaf Scholz. Merz is unlikely to invite Alice Weidel’s Alliance for Germany (AFD), also known as Far-Right, to form a government.
Market participants doubt that Frederich Merz will uplift the fractured German economy as a coalition government historically results in an obstructive parliament across the globe. This led to investors liquidating their longs on the Euro (EUR) in the North American session on Monday after strong initial gains. The German economy has been contracting for the last two years, and its outlook is weak due to fears of potential tariffs by United States (US) President Donald Trump.
ECB policymaker and Bundesbank President Joachim Nagel said last week that our “strong export orientation” makes us “particularly vulnerable” to potential Trump tariffs.
On the economic front, Eurozone Q4 Negotiated Wage Rates data came in at 4.12%, down from 5.43% in the previous quarter. Investors now await Isabel Schnabel, member of the European Central Bank (ECB) Executive Board, who delivers a keynote speech at Bank of England's Annual Research Conference, "The Future of the Central Bank Balance Sheet," in London, United Kingdom, at 13:00 GMT.
Daily digest market movers: EUR/USD faces pressure as US Dollar steadies
- EUR/USD is also facing pressure from renewed fears of a global trade war. On Monday, US President Donald Trump said that his plans of imposing 25% tariffs on Canada and Mexico on March 4, which were delayed by a month after both nations agreed to tighten border activities, are still on. “The tariffs are going forward on time, on schedule,” Trump said from the White House.
- Renewed fears of tariffs by Donald Trump on his North American partners have resulted in some stability in the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks lower on Tuesday but had a strong reversal move to near 106.75 on Monday after posting a fresh 11-week low near 106.10 the same day.
- On the economic front, US Durable Goods Orders and the Personal Consumption Expenditures Price Index (PCE) data for January will be the next major trigger for the US Dollar, which will be released on Thursday and Friday, respectively. Investors will pay close attention to the PCE inflation data, which is the Federal Reserve’s (Fed) preferred inflation gauge, as some officials have shown concerns over the stalling disinflation trend lately.
- In Tuesday’s session, investors will focus on the US Consumer Confidence data for February, which will be released at 15:00 GMT.
Technical Analysis: EUR/USD holds above 1.0450
EUR/USD trades with caution above Monday’s low of 1.0450 in Tuesday’s European session. The major currency pair continues to struggle to have a decisive breakout above the psychological resistance of 1.0500. The 50-day Exponential Moving Average (EMA) continues to support the major currency pair around 1.0440.
The 14-day Relative Strength Index (RSI) wobbles just below 60.00. A bullish momentum would activate if the RSI (14) manages to sustain above that level.
Looking down, the February 10 low of 1.0285 will act as the major support zone for the pair. Conversely, the December 6 high of 1.0630 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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