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EUR/USD falls back amid uncertainty ahead of Eurozone data, Fed policy

  • EUR/USD struggles to hold gains above 1.0700 amid uncertainty ahead of key economic events.
  • The ECB seems poised to start reducing key borrowing rates in June.
  • Eurozone’s CPI, Q1 GDP and the Fed’s policy outlook will be in focus.

The EUR/USD pair struggles to sustain above the round-level resistance of 1.0700 in Monday’s early American session. The major currency pair exhibits caution ahead of the release of key economic indicators in the Eurozone, such as preliminary Eurozone Q1 Gross Domestic Product (GDP) and the Consumer Price Index (CPI) data for April, which will be published on Tuesday. 

Eurozone’s economic data will influence speculation about interest rate cuts by the European Central Bank (ECB). Currently, investors’ expectations that the ECB will start to cut its Main Refinancing Operations Rate from the June meeting strengthened as policymakers see them as reasonable.

Last week, Banque de France Governor and ECB Council member François Villeroy de Galhau said there is no need to wait much longer to start interest rate cuts if other things remain constant. Villeroy expects that energy prices are unlikely to rise further despite Middle East tensions and, hence, should not impact the ECB’s plans to pivot to interest rate cuts starting in June.

While a rate-cut move in the June meeting is widely expected, there is uncertainty over whether the ECB will extend the rate-tightening campaign. ECB policymakers share different opinions on that as Villeroy said last week: “June rate cuts should be followed by further cuts, at a pragmatic pace.” On the contrary, ECB policymaker and Bundesbank Chief Joachim Nagel said last week that a June interest rate cut may not necessarily be followed up by a series of rate cuts. Nagel remains worried about higher service inflation due to strong wage growth. He is not fully convinced that inflation will actually return to target in a timely and sustained manner. 

Meanwhile, the German preliminary inflation data for April remains mixed. The annual Harmonized Index of Consumer Prices (HICP) grew at a higher pace of 2.4% from expectations and the prior reading of 2.3%. The monthly HICP rose steadily by 0.6%. Annual core CPI that strips off volatile food and energy prices grew steadily by 2.2%, while economists forecasted the underlying inflation have grown at a higher pace of 2.3%. Monthly core CPI rose at a slower pace of 0.5% from the estimates of 0.6%.

Daily digest market movers: EUR/USD is off from daily high ahead of German data

  • The EUR/USD falls from the intraday high of 1.0734. The major currency pair fails to hold gains as the US Dollar rebounds amid uncertainty ahead of a data-packed week
  • The US Dollar remains on the backfoot due to uncertainty over the US economic outlook. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, fell to 105.60 as weak preliminary US economic indicators such as the S&P Global Purchasing Managers’ Index survey for April and Q1 GDP have raised concerns over the economy’s strength in coping with higher interest rates by the US Federal Reserve (Fed).
  • The next move in the US Dollar will be guided by the Fed’s monetary policy decision, which will be announced on Wednesday. The US central bank is widely anticipated to keep interest rates steady in the range of 5.25%-5.50%. Therefore, investors will focus on the Fed’s guidance for interest rates. Considering the hot Q1 GDP Price Index and higher-than-expected US core Personal Consumption Expenditure Price Index (PCE) data for March, the Fed has no option but to deliver hawkish guidance on interest rates.
  • Fed policymakers are expected to reiterate the need to maintain interest rates at their current levels until they get confidence that inflation will come down sustainably to the desired rate of 2% target. Investors will focus on whether the Fed remains committed to three rate-cut projections during 2024. Actually, the CME FedWatch tool shows that the US central bank will only make two rate cuts this year, and the September meeting is likely to be chosen as the earliest point.

Technical Analysis: EUR/USD trades close to 1.0700

The EUR/USD attempts to establish firm footing above the 1.0700 hurdle. The shared currency pair extends its recovery from 1.0600 to 1.0700, but the near-term outlook is still uncertain. The 20-day Exponential Moving Average (EMA) near 1.0720 remains a major barricade for the Euro bulls. The 200-day EMA near 1.0800 is declining, suggesting that the long-term appeal is bearish. 

The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, indicating a consolidation ahead. 

The holistic view of the EUR/USD pair indicates a sharp volatility contraction due to a Symmetrical Triangle formation on a daily timeframe. The upward-sloping border of the triangle pattern is plotted from the October 3 low at 1.0448, and the downward-sloping border is placed from the December 28 high around 1.1140.

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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