- EUR/USD rises to 1.0790 as the US Dollar edges down due to weak US data.
- ECB Stournaras sees the central bank reducing interest rates three times this year.
- Weak US labor market data and poor ISM Services PMI darkens the US economic outlook.
EUR/USD moves higher to 1.0790 in Monday’s European session. The major currency pair posts gains as the US Dollar comes under pressure due to firm speculation that the Federal eserve (Fed) will start reducing interest rates from the September meeting. The action in the EUR/USD pair will come from the side of the US Dollar as the Eurozone economic calendar lacks tier-1 data this week. The European Central Bank (ECB) is widely anticipated to shift to policy normalization in the June meeting. Therefore, speculation about ECB’s stance on interest rates for the second-half of the year will influence the Euro’s move.
ECB policymakers are divided over extending the interest rate-cut cycle after the June meeting. A few policymakers believe that extending rate cuts from the July meeting could revamp price pressures. For the entire year, ECB policymaker and Bank of Greece Governor Yannis Stournaras said in an interview with a Greek media outlet that he sees three rate cuts this year. He sees a rate cut in July as possible and added that the Eurozone’s economic rebound in the first quarter of the year made three cuts more likely than four. The Eurozone economy expanded by 0.3% in the January-March period, beating expectations of 0.1% gain.
Daily digest market movers: EUR/USD rises as US Dollar edges down
- EUR/USD exhibits strength as the US Dollar falls in the aftermath of the United States labor market and the ISM Services Purchasing Managers Index (PMI) data for April released on Friday. The US Nonfarm Payrolls (NFP) report showed that fresh labor additions were significantly lower than the consensus and wage growth softened on a monthly and an annual basis.
- Easing labor market conditions weighed on the US Dollar Index (DXY), which fell to an almost four-week low of 104.60. However, the USD index recovered quickly as the ISM Services PMI showed that businesses pay higher prices for inputs.
- The ISM Services Prices Paid rose to 59.4 in April from 53.4, which suggested a stubborn inflation outlook. The inputs in the service sector are mainly the salaries paid to employees, which often leads to higher consumer spending and eventually prompts price pressures. Though the ISM Services PMI, which represents the service sector that accounts for two-thirds of the economy, falls below the 50.0 threshold to 49.4, the lowest reading since December 2022.
- Easing labor market conditions and weak ISM Service PMI have raised concerns over the US economic outlook. These have strengthened speculation for the Fed reducing interest rates in the September meeting. The CME FedWatch tool shows that traders see a 70% chance that interest rates will be lower than actual levels in September.
- Contrary to market expectations, Fed Governor Michelle Bowman said on Friday she would be willing to raise interest rates further if progress in declining inflation to 2% stalls or reverses Reuters reported. However, she is confident that inflation will decline even if interest rates remain where they are.
Technical Analysis: EUR/USD holds above 20-day EMA
EUR/USD extends its winning spell for the fourth trading session on Monday but is trading inside Friday’s trading range, exhibiting a sideways performance. The near-term appeal of the shared currency pair is upbeat as it is trading above the 20-day Exponential Moving Average (EMA), which trades around 1.0730.
Broadly, EUR/USD exhibits 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 October 3 low at 1.0448 and the downward-sloping border is placed from December 28 high around 1.1140.
The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, suggesting indecisiveness among market participants.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
