EUR/USD halts recent decline as US Dollar stabilizes
- EUR/USD struggles for a firm footing near 1.0800 as the USD Index clings to gains near a three-week high of 104.40.
- Investors await the US PCE inflation data on Friday for fresh interest rate guidance.
- ECB Villeroy supports a further decline in key borrowing rates.
EUR/USD strives to gain ground after a five-day losing streak near 1.0800 during European trading hours on Wednesday. Still, the outlook of the major currency pair is uncertain as the US Dollar (USD) holds onto recent gains, with the US Dollar Index (DXY) clinging to gains near an almost three-week high at 104.40, amid expectations that less disruptive Unites States (US) President Donald Trump’s tariff agenda will have lesser impact on the US economic outlook.
On Monday, President Trump said at the White House that all impending levies will not be imposed as he may give a "lot of countries" breaks on tariffs. It seems that various leaders of US trading partners have managed to negotiate deals with Trump. Though a Trump-led trade war is widely anticipated to result in an economic slowdown globally, a war with fewer nations will limit the scope of economic turmoil.
Still, the confidence of US consumers is declining as Trump’s tariffs will lead to a significant decline in households’ purchasing power. On Tuesday, the Conference Board reported a sharp decline in the Consumer Confidence data for March, a leading sentiment indicator that anticipates consumer behaviour. The sentiment data came in at 92.9, significantly lower than the 100.1 seen in February.
Going forward, the major trigger for the US Dollar will be the US Personal Consumption Expenditures Price Index (PCE) data for February, which will be released on Friday. Economists expect the US core PCE inflation, which is the Federal Reserve’s (Fed) preferred inflation gauge, to have grown at a faster pace of 2.7% year-on-year, compared to the 2.6% increase seen in January.
In last week's policy meeting, the Fed revised its forecast for the core Personal Consumption Expenditures Price Index (PCE) for this year to 2.8%, up from the 2.5% projected in the December meeting.
Daily digest market movers: EUR/USD trades with caution amid firm ECB dovish bets
- EUR/USD trades cautiously as the outlook of the Euro (EUR) is uncertain amid growing expectations that the European Central Bank (ECB) would cut interest rates again. The Eurozone economy is expected to face significant downside economic risks after the imposition of reciprocal tariffs by US President Trump.
- Trump had signaled plenty of times that he will impose tariffs on the Eurozone for not buying enough American goods. Such a scenario will be negative for the old continent. Historically, economies move to strengthen their domestic economy by lowering interest rates when external conditions are not conducive.
- The German economy has already shown its support to strengthen the economy by pumping more Euros into circulation. Last week, German leaders voted to stretch the borrowing limit to boost defense spending and the creation of an infrastructure fund worth 500 billion Euros.
- ECB President Christine Lagarde has also dialled back fears of persistent inflationary pressures due to a potential US-Eurozone trade war. Lagarde said last week that the inflationary impact of the trade war is temporary as the effect would “ease in the medium term” due to “lower economic activity dampening inflationary pressures”.
- On Tuesday, ECB Governing Council member and Bank of France Governor François Villeroy de Galhau said that there is still room to “lower interest rates further”, and the 2.5% Deposit Facility Rate could “fall to 2% by the end of the summer”.
Technical Analysis: EUR/USD slips below 1.0800
EUR/USD extended its correction from the five-month high of 1.0955 to near the 20-day Exponential Moving Average (EMA), which trades around 1.0760. However, the long-term outlook of the major currency pair is still bullish as it holds above the 200-day EMA, which oscillates around 1.0667.
The 14-day Relative Strength Index (RSI) cools down below 60.00, suggesting that the bullish momentum is over, but the upside bias is intact.
Looking down, the December 6 high of 1.0630 will act as the major support zone for the pair. Conversely, the psychological level of 1.1000 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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