EUR/USD ticks down on thin volumes, German HICP eyed
- EUR/USD falls as the US Dollar steadies in a thin-trading weekend due to holidays in the US on account of Thanksgiving Day.
- ECB Schnabel ruled of risks of inflation undershooting ECB’s target.
- Investors await the German HICP data for fresh ECB interest rate guidance.
EUR/USD ticks down on Thursday as the US Dollar (USD) steadies after a weak Wednesday. However, the near-term outlook of the Euro (EUR) has slightly improved after less-dovish remarks from European Central Bank (ECB) board member Isabel Schnabel in her interview with Bloomberg on Wednesday.
Schnabel pushed back expectations of an aggressive policy-easing cycle as she doesn’t see any risk of inflation undershooting the bank’s target. She argued that the central bank stimulus doesn’t address structural issues that the Eurozone is currently facing.
For more cues on the ECB interest rate path, investors will focus on the flash November’s Harmonized Index of Consumer Prices (HICP) data of Spain, Germany, and its six major states, which will be published in Thursday’s session. German HICP is estimated to have accelerated to 2.6% from 2.4% in October on year. Month-on-month HICP is expected to have deflated by 0.5%.
Meanwhile, fears of a potential decline in Eurozone exports due to the imposition of hefty tariffs by US President-elect Donald Trump have slightly eased, which could offer more support to the Euro. ECB President Christine Lagarde said in an interview with the Financial Times (FT) in the early European session on Thursday, “Trump's lack of specificity on a level of potential European tariffs may signal that he is open to negotiation,” according to MACE News. Lagarde added, “It's difficult to make America great again if global demand is falling due to trade tariffs.”
Daily digest market movers: EUR/USD edges lower as US Dollar gains temporary ground
- EUR/USD drops to near 1.0550 in the European trading session on Thursday after posting a fresh weekly low near 1.0590 on Wednesday. The major currency pair faces pressure as the US Dollar (USD) manages to gain temporary ground in a thin volume trading day amid a long weekend in the United States (US) economy on account of Thanksgiving Day.
- The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, discovers an interim cushion around 106.00 on Thursday after a sharp downside move on Wednesday. The Greenback will be influenced by market expectations for the Federal Reserve’s (Fed) likely interest rate action in the December meeting as the US economic calendar has nothing to offer.
- Traders see a 66% chance that the Fed will cut interest rates by 25 basis points (bps) to 4.25%-4.50% next month, according to the CME FedWatch tool. Fed rate cut prospects remain firm even though the US Personal Consumption Expenditure Price Index (PCE) data for October grew expectedly. Annual core PCE Price Index, a Fed’s preferred inflation gauge – which excludes volatile food and energy prices – rose by 2.8%, faster than 2.7% in September.
Technical Analysis: EUR/USD strives to revisit 20-day EMA
EUR/USD drops after failing to extend Wednesday’s rally above the round-level resistance of 1.0600. The recovery in the major currency pair appears to be a mean-reversion move, which could extend to near the 20-day Exponential Moving Average (EMA) around 1.0600. Still, the broader outlook would remain bearish as all short-to-long-term day EMAs are declining, pointing to a downside trend.
The 14-day Relative Strength Index (RSI) rebounded after conditions turned oversold and climbed above 40.00, suggesting that the bearish momentum has faded. However, the bearish trend has not been extinguished.
Looking down, the November 22 low of 1.0330 will be a key support for Euro bulls. On the flip side, the 50-day EMA near 1.0750 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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