Market Data 
- EUR/USD pierces below the key 200-day SMA on Friday after Bundesbank’s Nagel raises prospect of an early interest-rate cut.
- The pair comes off its lows in the last hour, however, supported by positive German IFO Business Sentiment data.
- EUR/USD is poised to extend breaks below key support levels as key central bank figures line up to speak.
EUR/USD is trading down almost half a percent on Friday, in the lower 1.0800s, below the 200-day Simple Moving Average (SMA), after comments from the President of the Bundesbank Joachim Nagel, suggested the European Central Bank (ECB) could be in a position to cut rates before the summer recess.
The pair continues to paint trader’s screens red, with even positive German IFO data – which hits a 9-month high – only managing to administer a “band aid” temporarily steming the bleeding after its release.
EUR/USD bleeds lower on Nagel statement
EUR/USD was delivered a body blow on Friday during the European session after President of the Bundesbank, Joachim Nagel said he foresaw the ECB potentially cutting interest rates before the summer recess, which was interpreted as meaning most likely in June.
“If I would put it into probabilities, definitely something in June has a higher probability than in April.” Said Nagel, according to Reuters.
Markets forecast 89 basis points of rate cuts, or at least three but possibly four 25 basis-point moves, with the first coming in June or July.
The Bundesbank President stressed an initial cut would not imply subsequent moves. The ECB would make decisions on a meeting by meeting basis as fresh data became available.
His most recent comments suggested he is concerned about “Europe’s growth prospects more than his homeland” and back in February, he said the governing council should wait for Q2 wage data before deciding on whether to cut interest rates or not.
Nagel was speaking at a webcast on “monetary policy challenges and the economic outlook for the Eurozone and Germany,” according to the economic calendar.
EUR/USD comes off lows after German IFO data hits 9-month high
EUR/USD managed to stem its bleed lower on Friday, but only temporarily after strong German sentiment data improved the outlook for the country.
The headline German IFO Business Climate Index arrived at 87.8 in March, higher than the February reading of 85.5, much above the market consensus of 86.0.
Meanwhile, the Current Economic Assessment Index rose from 86.9 in February to 88.1 in the reported month, beating expectations of 86.8.
The IFO Expectations Index – indicating firms’ projections for the next six months, edged higher to 87.5 in March vs. 84.1 recorded in the previous month while surpassing the expected 84.7 figure.
EUR/USD bounced off the 1.0808 session lows after the release of the data, but only recouped losses marginally.
EUR/USD: A day of doves and hawks
The key drivers for the pair at the end of the week will probably be commentary from central bankers.
Their comments could impact the outlook for interest rates, which are set by central banks. Interest rates impact currencies because they dictate the level of foreign capital inflows from investors searching for returns. When interest rates are expected to go up it is positive for a currency; when down negative. Currently, the debate hinges around the timing of future rate cuts, with the consensus being that both the ECB and the Fed will make cuts in June. Anything that deviates from that view could cause volatility.
At 13:00 GMT, Federal Reserve Chairman Jerome Powell will participate in a “Fed Listens” panel about current economic conditions and how Covid impacted the economy. Vice-Chair Philip Jeffereson and Governor Michelle Bowman will also be at the event.
At 16:00 GMT, Federal Reserve Vice-Chair for Supervision Michael Barr will participate in a virtual discussion titled “International Economic and Monetary Design”.
At 17:00 GMT , ECB Chief Economist and Board Member Philip Lane will deliver a policy lecture on inflation and monetary policy at the Aix-Marseille School of Economics (AMSE).
At 20:00 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic will moderate a conversation about household finances at the 2024 Household Finance Conference – there is an outside chance he could mention interest rates.
Technical Analysis: EUR/USD tests trendline and 200-day SMA
EUR/USD is making volatile switches inside the 1.0800s and 1.0900s. It is currently trading back down in the 1.0800s just below the 200-day SMA at 1.0839, and a major trendline.
Euro versus US Dollar: Daily chart
The pair appears to be threatening to break below the trendline which could usher in a more bearish phase.
Such a move would be likely to tumble to at least 1.0775, the 0.618 Fibonacci extension of the move prior to the breakout lower, a common method of forecasting targets for trendline breaks.
The move down lacks momentum, however, as evidenced by the Relative Strength Index (RSI) on the 4-hour chart below, which shows RSI failing to reflect price’s current move down to a lower low – a suggestion bearish conviction is lacking.
Euro versus US Dollar: 4-hour chart
Whilst the lack of momentum does not completely preclude the expectation price will fall further, it brings in a note of caution and suggests bears should be careful not to be caught in what could potentially be a false break.
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.
