- EUR/USD edges down ahead of HICP inflation data for the Eurozone.
- Speeches by several key ECB governing council members could also impact EUR/USD.
- EUR/USD enters oversold levels on the daily chart, indicating risk of a pullback.
EUR/USD trades slightly down on Wednesday in the lower 1.0600s, as it clocks up a sixth consecutive day of losses.
The pair is entering the oversold zone on charts, suggesting traders may be operating with more caution. Whilst this does not definitively indicate an end to the downtrend itself, it does up the odds of an upward correction potentially evolving on the horizon.
In terms of volatility, the main events on the calendar for EUR/USD on Wednesday are the final estimates for Eurozone March inflation data, and several speeches by European Central Bank (ECB) officials.
EUR/USD: Traders await final estimates, ECB speeches
EUR/USD could see some volatility after the release of the final estimates for Eurozone March Inflation data at 9:00 GMT on Wednesday. Levels of inflation inform the decisions of the ECB regarding the setting of interest rates, a key driver in the FX markets.
If the revisions deviate from the initial estimates the pair may fluctuate.
Flash estimates for the Harmonized Index of Consumer Prices (HICP) in March, showed a 2.4% rise year-on-year, down from 2.6% previously. The final estimate is also expected to show 2.4%.
The flash estimate for Core HICP showed a 2.9% rise YoY from 3.1% previous, and 0.8% month-on-month from 1.1% in February. Again, in both cases, the final estimate is expected to remain unchanged.
Any deviation in the data, however, is likely to move EUR/USD.
A lower-than-expected final estimate would solidify expectations that the ECB will go ahead and cut interest rates in the near-term, probably in June. Since lower interest rates, or their expectation, tend to reduce foreign capital inflows, such a result would probably depreciate to the Euro (EUR) and push down EUR/USD.
If HICP is revised up, this might raise some doubt about whether the ECB will go ahead with a rate cut in June, which could strengthen the Euro and see EUR/USD recover.
Speeches by key ECB members throughout the day, including ECB Executive Board Member Piero Cipollone, ECB Executive Board Member Isabel Schnabel and President Christine Lagarde herself could also impact the pair’s volatility.
The case for an imminent cut in interest rates – the ECB’s key main refinancing operations rate stands at 4.50% – was strengthened on Tuesday after ECB President Christine Lagarde said that the ECB will cut rates soon, bar a surprise, and that the ECB was keeping a close eye on Oil prices due to tensions in the Middle East.
Technical Analysis: EUR/USD bears are oversold
The EUR/USD pair is firmly in a downtrend on both its short and medium-term time frames, since peaking and rolling over at 1.1139 in December.
EUR/USD Daily Chart
The downtrend thesis is supported by the fact that the pair is trading below all its key major moving averages – the 50-day, 100-day and 200-day Simple Moving Averages (SMA).
It is making lower lows and lower highs and this trend is biased to continue – with one caveat.
The Relative Strength Index (RSI) momentum indicator is flashing oversold on the daily chart. At the moment this is only a warning for short-traders not to add to their positions, however, if the RSI were to exit oversold and rise back above 30, it would be a sign the pair was correcting and for short-traders to close their positions and open longs.
As things stand it is still possible the pair could continue lower and even if there is a correction the dominant downtrend is still likely to resume. The next key downside target for the pair is the 2023 lows at 1.0446.
If a pullback evolves, meanwhile, a possible target could be the swing low at 1.0700.
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.
