- EUR/USD continues its bounce higher as traders take profit after last week’s volatile sell-off.
- The divergence between Federal Reserve and European Central Bank speakers suggests future weakness is possible.
- US Durable Goods Orders are the main release for the pair on Tuesday.
EUR/USD is trading over a tenth of a percent higher in the mid 1.0800s on Tuesday, in line with broader US Dollar (USD) selling.
Both the US Dollar Index (DXY), which tracks the currency’s performance against a basket of competitors, and the highly correlated US 10-year Note yield are trading lower too.
EUR/USD has now broken back above the key 50-day and 200-day Simple Moving Averages (SMA) as it rebounds from the 1.0801 lows of the previous week.
EUR/USD bounces on profit-taking
EUR/USD continues Monday’s half-hearted bounce, probably on the back of profit taking after last week’s USD surge rather than specific fundamental drivers.
Although US New Home Sales data out on Monday showed a slight decline of 0.3% from the previous month, the overall economic picture continues to indicate the US economy is ticking over exceptionally well and inflation remains elevated.
This in turn suggests that the Federal Reserve (Fed) will not need not be too hasty in cutting interest rates, a key FX driver. Interest rates remaining higher for longer is positive for the Greenback as it attracts greater inflows of foreign capital.
On Monday, commentary from Fed speakers was overall hawkish, advocating for a delay in cutting interest rates.
The President of the Federal Reserve Bank of Atlanta, Raphael Bostic, said he only believed the Fed would cut once in 2024, as opposed to the official line which continues to be for three cuts.
Federal Reserve Governor Lisa Cook was cautious, arguing that the Fed needed to take a “careful approach” to easing over time to “ensure inflation returns sustainably to 2.0%.”
Their comments were probably responsible for the slight recovery in some USD pairs during Monday’s US session.
On Tuesday, US Durable Goods Orders for February will provide further intelligence on the US economy which could impact the pair.
The headline figure is expected to show a 1.3% rise in February following the 6.2% decline in January. A dramatic change from the expected could move EUR/USD, with a higher-than-forecast figure pushing the pair down and vice versa for a lower number.
ECB officials strike dovish tone
In Europe by contrast, central bank officials struck a more dovish tone on Monday, with several European Central Bank (ECB) Governing Council members intimating the possibility of earlier-than-expected interest-rate cuts.
ECB Member Fabio Panetta said that inflation was quickly falling to target and therefore there was a “consensus emerging” for a rate cut. His comments increase the probability of a rate cut in June – or even earlier. A rate cut in April would be bearish for the Euro as lower interest rates attract less flows of foreign capital.
ECB Chief Economist Philip Lane said on Monday that he was “confident” wage inflation was “on track” to falling to a level consistent with the ECB meeting its 2% inflation target. Lane also said that at that point the ECB could start reversing its interest rate policy.
If anything, the widening gap between what Fed speakers are advocating and what ECB officials are saying should be pushing EUR/USD lower. However, it is possible that last week’s sell-off has already priced the Fed-ECB divergence.
Technical Analysis: EUR/USD pulls back in short-term downtrend
EUR/USD continues to labor higher on Tuesday after bouncing off the lows of the wave B of the three-wave Measured Move pattern that unfolded higher during February and early March.
The current recovery looks like a pullback in an established short-term downtrend with eventual weakness likely to resume.
Euro versus US Dollar: 4-hour chart
A decisive break below the B-wave lows at roughly 1.0795 would signal a continuation of the downtrend to the next target at 1.0750 – then the February lows at 1.0700.
A decisive break is one characterized by a long red bearish candle that breaks cleanly through the level and closes near its low, or three down candles in a row that breach the level.
Alternatively, a move above the 1.0950 level would bring into question the validity of the short-term downtrend.
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.
