EUR/USD falls slightly with Eurozone inflation and Powell’s speech in focus
- EUR/USD corrects to near 1.0720 as the US Dollar recovers despite weak US Manufacturing PMI data.
- The Euro remains on tenterhooks ahead of the preliminary Eurozone HICP report for June.
- Investors await Fed Powell’s speech for fresh guidance on interest rates.
EUR/USD edges lower but holds the crucial support of 1.0700 in Tuesday’s European session, correcting down from a more than two-week high near 1.0770 recorded on Monday. The major currency pair is expected to remain volatile as investors shift focus to the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data for June, which will be published at 09:00 GMT.
The inflation report is expected to show that HICP decelerated to 2.5% year-on-year from May’s reading of 2.6%. In the same period, the core HICP, which excludes volatile components like food, energy, alcohol, and tobacco, is estimated to have grown at a slower pace of 2.8% from the prior release of 2.9%. The scenario in which price pressures decline, at an expected or at a higher pace, will boost expectations of the European Central Bank’s (ECB) subsequent interest rate cuts.
On Monday, the preliminary German HICP report for June showed that price pressures softened more than expected, opening the door for the ECB to make back-to-back rate cuts. However, policymakers have refrained from providing a specific rate-cut path as they worry that an aggressive policy-easing campaign could revamp price pressures again.
Also, ECB President Christine Lagarde said at the ECB Forum on Central Banking on Monday, "It will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed." Lagarde added, "The strong labor market means that we can take time to gather new information," Reuters reported.
Apart from the Eurozone’s inflation data, France’s second-round runoffs scheduled on July 7 will also keep the Euro on its toes. As per the exit polls for the first round of France's parliamentary elections, Marine Le Pen's far-right National Rally (RN) is in a comfortable position but with a smaller margin than projected.
Daily digest market movers: EUR/USD remains uncertain as US Dollar bounces back
- EUR/USD falls slightly as the US Dollar (USD) rebounds despite the United States (US) ISM Manufacturing Purchasing Managers’ Index (PMI) report for June showing that factory activities unexpectedly declined. Data also indicate that inflationary pressures in the manufacturing sector, measured by the ISM Manufacturing Prices Paid Index, grew at a significantly slower pace than expected.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers sharply to near 106.00. Meanwhile, investors look for more cues about when the Federal Reserve (Fed) will start reducing interest rates this year. For that, investors will focus on Fed Chair Jerome Powell’s speech, scheduled at 13:30 GMT.
- Currently, financial markets expect the Fed to start reducing interest rates from the September meeting. Two rate cuts this year, against only one cut projected by Fed policymakers in their latest dot plot, are expected.
- Apart from Fed Powell’s speech, investors will also focus on the JOLTS Job Openings data for May, which will be published at 14:00 GMT. Economists expect that employers posted 7.9 million job vacancies, slightly lower than April’s reading of 8.06 million.
Technical Analysis: EUR/USD holds key support of 1.0700
EUR/USD drops to near 1.0720 after failing to hold above the 20-day Exponential Moving Average (EMA), which trades around 1.0740. The major currency pair rebounded last week after discovering strong buying interest near the upward-sloping border of the Symmetrical Triangle formation on a daily timeframe near 1.0666, which is marked from 3 October 2023 low at 1.0448. The downward-sloping border of the above-mentioned chart pattern is plotted from 18 July 2023 high at 1.1276. The Symmetrical Triangle formation exhibits a sharp volatility contraction, which indicates low volume and narrow ticks.
The major currency pair remains below the 200-day Exponential Moving Average (EMA) near 1.0790, suggesting that the overall trend is bearish.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.
Euro FAQs
The Euro is the currency for the 20 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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