EUR/USD finds support as US Dollar struggles to extend recovery
- EUR/USD attracts some bids near 1.1300 as the US Dollar faces downward pressure after a two-day recovery.
- Washington has shown openness to reach a trade deal with China.
- ECB Nagel warns that the German economy could enter a mild recession.
EUR/USD finds cushion near 1.1300 during European trading hours on Thursday after a two-day correction. The major currency pair tests ground as the US Dollar (USD) faces pressure as it attempts to extend its recent recovery. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to break above the immediate high around 100.00.
Despite Thursday’s mild losses, financial market participants seem to be pricing in a further recovery in the US Dollar in the near term amid increasing hopes of a de-escalation in the trade war between the United States (US) and China. Washington has shown a willingness to get to the table with Beijing, but these can’t proceed without a reduction in critically higher tariff rates.
Currently, the US has imposed additional 145% tariffs on Chinese products, inclusive of a 20% fentanyl levy, and Beijing has increased duties by 125% on imports from the US. "Neither side believes that these are sustainable levels,” US Treasury Secretary Scott Bessent said on Wednesday. The Wall Street Journal (WSJ) reported on Wednesday that the administration could reduce additional tariffs on China to between roughly 50% and 65%.
On Tuesday, US President Donald Trump also signaled that “discussions with Beijing are going well” and added that he thinks “they will reach a deal”. Trump further added that tariffs on China would not be as high as “145%, but they wouldn’t be zero”.
However, in the longer term, investors still doubt the strength of the US Dollar as domestic business activity has been hit hard by fears of a potential economic slowdown. The flash S&P Global Purchasing Managers’ Index (PMI) report showed on Wednesday that tariffs are causing companies to “hike their selling prices at a pace not seen for over a year”. The agency warned that these higher prices will “inevitably feed through to higher consumer inflation, potentially limiting the scope for the Federal Reserve (Fed) to reduce interest rates at a time when a slowing economy looks in need of a boost”.
Daily digest market movers: EUR/USD rebounds slightly as Euro gains
- A slight recovery move in the EUR/USD pair is also driven by brief strength in the Euro (EUR). The major currency gains even though traders have become increasingly confident that the European Central Bank (ECB) will cut interest rates in the June policy meeting. The reason behind accelerating ECB dovish bets is officials’ confidence that inflation will return to the central bank’s target of 2% this year.
- On Wednesday, ECB policymaker and Bundesbank President Joachim Nagel reiterated that he expects “Eurozone inflation to return to 2% over the course of this year”, even when the “level of uncertainty is extraordinarily high”, Reuters reports. Nagel warned that the German economy could see a mild “recession” for the third year in a row in the face of tariffs announced by US President Trump.
- Apart from ECB monetary policy expectations, the major trigger for the Euro is negotiations between the European Union (EU) and Washington. Though both nations have shown openness to have a deal and maintain healthy trade relations, there has not been much progress since April 7, when EU trade commissioner Maros Sefcovic stated that the administration has offered the US “zero-for-zero tariffs” for cars and all industrial goods.
- Also, German Finance Minister (FM) Joerg Kukies indicated that he is hopeful of having a trade agreement with the US while interviewed by Deutschlandfunk broadcaster on Wednesday. Kukies answered diplomatically and drew scenarios. "The position is very simple: Plan A is that we want an agreement and the tariffs should go down instead of going up, and Plan B is if this doesn’t work, we will use countermeasures.”, he said.
Technical Analysis: EUR/USD gauges ground near 1.1300
EUR/USD strives to gain ground after a two-day correction to near 1.1300 on Thursday. The major currency pair had shown a strong rally in the last few weeks after a breakout above the September 25 high of 1.1215. Advancing 20-week Exponential Moving Average (EMA) near 1.0850 suggests a strong upside trend.
The 14-week Relative Strength Index (RSI) climbs near overbought levels above 70.00, which indicates a strong bullish momentum, but chances of some correction cannot be ruled out.
Looking up, the round-level figure of 1.1600 will be the major resistance for the pair. Conversely, the July 2023 high of 1.1276 will be a key support 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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