- EUR/USD moves higher above 1.0900 as investors see a Fed rate cut in September as a done deal.
- Better-than-expected US Retail Sales report fails to diminish Fed rate-cut prospects.
- The ECB is expected to leave interest rates unchanged on Thursday.
EUR/USD jumps above 1.0900 and reaches a new four-month high in Wednesday’s European session. The major currency pair extends gains after recovering its losses on Tuesday, driven by the better-than-expected United States (US) Retail Sales report for June.
Data showed on Tuesday that monthly Retail Sales remained unchanged, as expected, as lower receipts at auto showrooms were offset by robust demand for core goods. The Retail Sales Control Group, a key measure of consumer spending component of Gross Domestic Product (GDP) that excludes receipts from auto dealers, building-materials retailers, gas stations, office supply stores, mobile home dealers, and tobacco stores, rose at a stronger pace of 0.9% than the former release of 0.4%.
The US Census Bureau also revised May’s Retail Sales reading to 0.3% from 0.1%, adding to economic strength. Though the Retail Sales report has emerged better than estimates, it is unable to weaken firm speculation that the Federal Reserve (Fed) will start reducing interest rates from the September meeting.
Traders see the gossip of rate cuts in September as a done deal due to cooling inflationary pressures and easing labor market strength. The recent consumer inflation report for June signaled that the disinflation process has resumed after a hiatus in the first quarter of the year.
Also, recent commentary from Fed officials has indicated that their confidence in inflation declining to the bank’s target of 2% has improved. On Tuesday, Fed Governor Adriana Kugler signaled cautious optimism that inflation is on the path to return to the bank’s target of 2%. Kugler acknowledged progress in disinflation in all three categories: goods, services and now housing, Reuters reported.
Daily digest market movers: EUR/USD rises further as US Dollar weakens
- EUR/USD is expected to trade cautiously with a focus on the European Central Bank’s (ECB) monetary policy meeting, which is scheduled for Thursday. The ECB is expected to leave interest rates unchanged. Therefore, investors will pay close attention to commentary on the interest rate outlook to know when the ECB will cut interest rates again.
- The ECB delivered its first rate cut in June after maintaining a restrictive interest rate framework for two years to tame hot inflationary pressures driven by coronavirus pandemic-led stimulus. ECB officials voted to roll back the tight policy stance after gaining confidence that inflation will return to the desired rate of 2%. However, policymakers expect price pressures to remain at their current levels for the entire year and return to the bank’s target next year.
- Financial markets expect the ECB to deliver two more rate cuts this year. Meanwhile, investors’ sentiment in the Eurozone’s largest economy, Germany, has deteriorated due to weak demand from both domestic and overseas markets.
- On Tuesday, a sharp decline in the German ZEW Survey – Economic Sentiment for July raised concerns over the economic outlook. The sentiment data, a key measure of the sentiment of institutional investors towards economic growth, declined at a robust pace to 41.8 from the consensus of 42.5 and May’s reading of 47.5.
Technical Analysis: EUR/USD moves higher to 1.0950
EUR/USD edges higher to near 1.0950. The major currency pair strengthens after a breakout of a Symmetrical Triangle formation on a daily timeframe. A breakout of the above-mentioned chart pattern results in wider ticks and heavy volume. The shared currency pair is expected to extend its upside towards the March 8 high near 1.0980.
The major currency pair’s near-term outlook is bullish as the 20-day Exponential Moving Average (EMA) near 1.0816 is sloping higher.
The 14-day Relative Strength Index (RSI) shifts into the bullish range of 60.00-80.00, suggesting a strong upside momentum.
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.
