Market Data 
- EUR/USD struggles to extend its upside above 1.1200 as the ECB is expected to cut interest rates again in September.
- Fed’s Chairman Jerome Powell gives green signal to an interest-rate cut in September.
- Investors await the US core PCE inflation data for July and flash Eurozone HICP for August.
EUR/USD corrects slightly from 1.1200, the highest level seen in more than a year, in Monday’s European session. Still, the broader outlook for the major currency pair is positive as the US Dollar (USD) remains on the backfoot as a Fed rate cut in September is fully priced in.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to gain ground after posting a fresh year-to-date (YTD) low of 100.53.
Market expectations for Fed interest rate cuts in September appear to be certain as Fed Chair Jerome Powell said in his speech at the Jackson Hole (JH) Symposium on Friday that “the time has come for policy to adjust”.. Powell’s speech suggested that the central bank is more concerned about growing risks in the labor market, while it is gaining confidence that inflation is sustainably on track to the desired rate of 2%. “We will do everything we can to support a strong labor market, Powell added”
Even though the Fed is widely anticipated to deliver an interest rate cut in September, traders remain split over its size. According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that the likelihood of a 50-basis point (bps) interest-rate reduction is at 36.5%, while the remaining 63.5% points to a smaller 25 bps cut.
On the economic data front, investors await the United States (US) Durable Goods Orders data for July, which will be published at 12:30 GMT. Economists estimate that fresh orders for Durable Goods rose by 4% after contracting by 6.7% in June.
This week, the major trigger for the US Dollar will likely be the US core Personal Consumption Expenditure Price Index (PCE) data for July, which will be published on Friday. The Fed’s preferred inflation measure is estimated to have grown at a steady pace of 0.2% month-over-month.
Daily digest market movers: EUR/USD corrects mildly on ECB rate cut bets
- EUR/USD trades close to a fresh YTD high of 1.1200 in European trading hours. The major currency pair edges lower as the Euro (EUR) underperforms its major peers amid growing speculation that the European Central Bank (ECB) will reduce interest rates again in the September meeting. The ECB is also expected to deliver one more interest rate cut in the last quarter of this year.
- Market expectations for ECB interest rate cuts in September have increased due to rising uncertainty over the Eurozone economic outlook and easing wage growth. Economic activity in the Eurozone surprisingly rose in August, as shown by the flash HCOB PMI report, but this rebound was largely driven by strong demand in France due to the Olympics in Paris. Economists considered it a one-time event and not a structural change.
- On the contrary, ECB Chief Economist Philip Lane said at the JH Symposium on Saturday that the monetary policy needs to be restrictive. Lane acknowledged that the ECB has made some progress in inflation but also said that the success over inflation is not assured, Reuters reported.
- For more cues on the interest rate guidance, investors will focus on the preliminary German and Eurozone Harmonized Index of Consumer Prices (HICP) data for August, which will be published on Thursday and Friday, respectively. Eurozone annual headline and core HICP, which excludes volatile items, are estimated to have decelerated to 2.3% and 2.8% respectively.
- Meanwhile, the IFO Institute reported on Monday that the German Business Climate, Current Assessment, and Expectations of August beat expectations but remained lower than July’s readings. The reading failed to provide any significant impetus to the EUR/USD pair.
Technical Analysis: EUR/USD delivers fresh swing high at 1.1200
EUR/USD posted a fresh swing high at 1.1200 on the weekly timeframe, suggesting a bullish reversal. The major currency pair strengthened after a breakout of the Symmetrical Triangle chart pattern. The upward-sloping 10-week Exponential Moving Average (EMA) near 1.0940 warrants more upside ahead.
The 14-period Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, suggesting a strong upside momentum. Still, it has reached overbought levels at around 70.00, increasing the chances of a corrective pullback. On the upside, the July 2023 high at 1.1275 will be the next target for the Euro bulls.
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.
