EUR/USD consolidates above 1.0800 mark, upside potential seems limited
- EUR/USD ticks lower on the last day of the week, albeit it lacks any follow-through selling.
- A softer tone around the US bond yields undermines USD and lends support to the major.
- Expectations for a less aggressive Fed easing and more ECB rate cuts should cap the upside.
The EUR/USD pair struggles to capitalize on the previous day's strong move-up of around 60 pips and trades with a mild negative bias during the Asian session on Friday. Spot prices, however, manage to hold comfortably above the 1.0800 mark and a nearly four-month low touched on Wednesday amid subdued US Dollar (USD) price action.
The USD Index (DXY), which tracks the Greenback against a basket of currencies, consolidates after the overnight pullback from its highest level since July 30 amid a softer tone surrounding the US Treasury bond yields. Apart from this, signs of stability in the equity markets turn out to be another factor undermining the safe-haven buck, which, in turn, helps limit losses for the EUR/USD pair.
That said, growing acceptance that the Federal Reserve (Fed) will proceed with smaller rate cuts amid a still resilient economy, along with deficit-spending concerns after the US presidential election, act as a tailwind for the US bond yields. Apart from this, persistent geopolitical risks stemming from the ongoing conflicts in the Middle East favors the USD bulls and should cap the EUR/USD pair.
Meanwhile, the flash Eurozone PMIs released on Thursday showed that the economy stalled for the second successive month in October and slowing inflation. This, in turn, validates the European Central Bank's (ECB) view that the disinflationary process is well on track and supports prospects for further policy easing, which might undermine the Euro and contribute to keeping a lid on the EUR/USD pair.
Market participants now look to the release of the German Ifo Business Climate Index for some impetus ahead of the US macro data – Durable Goods Orders and the revised Michigan Consumer Sentiment Index. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and assist traders in grabbing short-term opportunities around the EUR/USD pair.
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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