EUR/USD gains as US Dollar declines, US PCE inflation in focus
- EUR/USD rises as the US Dollar posts a fresh weekly low ahead of a slew of US economic data.
- The optimism over Bessent maintaining fiscal discipline keeps the US Dollar under pressure.
- ECB’s Centeno warned about the risk of price pressures remaining below the bank’s target.
EUR/USD jumps higher to near 1.0530 in Wednesday’s European session. The major currency pair strengthens as the US Dollar (USD) tumbles ahead of a string of United States (US) economic data such as the Personal Consumption Expenditure Price Index (PCE), Durable Goods Orders, and Personal Spending data for October, revised Q3 Gross Domestic Product (GDP) growth estimates, and Initial Jobless Claims data for the week ending November 22, which will be published in the North American session.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, posts a fresh weekly low near 106.35. The Greenback has corrected lately after posting a fresh two-year high at around 108.00 on Friday. The correction was triggered after Scott Bessent, a veteran hedge fund manager, said that the objective of enacting tariffs will be “layered in gradually and the budget deficit will be reduced to 3% of Gross Domestic Product (GDP) by slashing spending,” a move that won’t result in high inflation than feared. The comments from Bessent came after US President-elect Donald Trump nominated him for Treasury Secretary.
Within the array of US data, investors will pay close attention to the PCE inflation, the Federal Reserve’s (Fed) preferred inflation measure for decision-making on policy rates. The PCE report is expected to show that the headline inflation accelerated to 2.3% year-over-year in October from 2.1% a month earlier.
In the same period, the core PCE – which excludes volatile food and energy prices – is estimated to have risen by 2.8%, stronger than the former release of 2.7%. The month-on-month headline and core PCE are expected to have grown steadily by 0.2% and 0.3%, respectively.
The US PCE inflation data will influence Fed interest rate cut prospects for the December meeting. On Monday, Minneapolis Fed Bank President Neel Kashkari said it is reasonable to consider another interest rate reduction in the December meeting. His viewpoint of an interest rate cut next month was backed by expectations that inflation is gently trending down and the labor market remains strong right now.
Daily digest market movers: EUR/USD gains despite ECB officials worry about Eurozone economic growth
- EUR/USD gains at the US Dollar’s expense on Wednesday. However, the outlook of the Euro (EUR) is downbeat as European Central Bank (ECB) policymakers have grown nervous over the Eurozone’s current and forward economic growth.
- On Tuesday, ECB policymaker and Portuguese central bank chief Mario Centeno warned that the economy was stagnating and "risks are accumulating downwards," with tariffs threatened by Trump a further downside risk. When asked about his outlook on the monetary policy, Centeno warned about the risk of inflation undershooting the bank's target and advised not to leave rate cuts too late.
- An interest rate reduction from the ECB is almost certain in the December meeting, however, market participants are mixed about the likely rate cut size. “The view here remains there is no fiscal calvary coming in the eurozone and that the only way to address the current malaise is for the European Central Bank to cut rates more quickly than usual. The market now prices 37bp of a 50bp ECB cut in December and short-dated US; eurozone spreads remain very wide at 190bp,” analysts at ING said in a note.
- For fresh guidance on the interest rate path, investors will focus on the flash November Harmonized Index of Consumer Prices (HICP) data for the Eurozone and its major economies, which will be published on Thursday and Friday.
Technical Analysis: EUR/USD rises above 1.0500
EUR/USD jumps above the psychological figure of 1.0500 in European trading hours on Wednesday. The major currency pair continues to hold the near-term low of 1.0330. However, the outlook remains bearish as all short-to-long-term day Exponential Moving Averages (EMAs) in the daily chart are declining, pointing to a downside trend.
The 14-day Relative Strength Index (RSI) rebounded after conditions turned oversold. However, the oscillator has cooled down, which could allow bears to take charge again.
Looking down, the November 22 low of 1.0330 will be a key support for Euro bulls. On the flip side, the November 20 high round 1.0600 will be the key barrier.
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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