- EUR/USD advances above 1.0900 as the US Dollar extends its downside amid growing concerns over the US economic outlook.
- The Euro gains as German Greens agreed to support defense spending plans.
- Investors await the US JOLTS Job Openings data for January and the CPI data for February.
EUR/USD posts a fresh four-month high above 1.0900 in European trading hours on Tuesday. The major currency pair strengthens as the US Dollar (USD) underperforms its peers amid escalating fears of an economic slowdown in the United States (US). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, refreshes the four-month low near 103.30.
Investors have dumped the US Dollar lately amid caution that the US economy could face economic shocks in the near term due to President Donald Trump’s “America First” policies. Market participants had been expecting Trump’s policies to be inflationary and pro-growth in the long term but now see severe economic turbulence in the near term, assuming that US employers will bear the pressure of higher tariffs.
Business owners are unlikely to bear the wholesome tariff burden and will pass on the impact to end consumers. Such a scenario would result in a sharp decline in the overall demand as higher prices would diminish the purchasing power of consumers. Deepening fears of Trump tariff-led slowdown have also led to an increase in market expectations that the Federal Reserve (Fed) will reduce interest rates in the May policy meeting. The likelihood for the Fed to cut interest rates in May has increased to 51% from 37% a day ago, according to the CME FedWatch tool.
For more cues on the Fed’s monetary policy outlook, investors will focus on the US Consumer Price Index (CPI) data for February, which will be released on Wednesday. The inflation data is expected to decelerate but remain above the Fed’s target of 2%. On Friday, Fed Chair Jerome Powell said in an economic forum at the University of Chicago Booth School that the Fed policy is not on a “preset course,” and we can maintain “policy restraint for longer if inflation progress stalls”.
In Tuesday’s session, investors will pay close attention to the US JOLTS Job Openings data for January, which will be published at 14:00 GMT. Economists expect US employers to have posted 7.75 million new jobs, marginally higher than the 7.6 million seen in December.
Daily digest market movers: EUR/USD strengthens as Euro outperforms
- The strength in the EUR/USD pair is also driven by the Euro’s (EUR) outperformance against its peers. The Euro advances in hopes that Franziska Brantner-led-German Green Party would support clearing the defense spending deal, which will be discussed on Thursday. Hopes for Greens to agree to stretch Germany’s borrowing limit accelerated after positive commentary from Franziska Brantner in an interview with Bloomberg on Tuesday during European hours.
- “Of course we are ready to negotiate,” the Green party’s co-head Franziska Brantner said and added, “The situation is dire in Ukraine and we really need Europe to speed up its own defense spending.” Earlier, Greens vowed to oppose restricting ‘debt reforms’. On Monday, Branter said that their party will not likely allow the next Chancellor Friedrich Merz and Social Democratic Party’s (SDP) co-leader Lars Klingbeil to “abuse a difficult European security situation”.
- The shared currency had been performing strongly for almost two weeks as an increase in Germany’s spending capability by widening “the debt brake” would stimulate the economy, which had been fractured and contracted in the last two years.
- Additionally, German spending plans have also forced traders to reassess bets supporting the European Central Bank (ECB) to cut interest rates two times more by the summer. The ECB has already cut its borrowing rates twice this year, and traders had fully priced in two more interest rate cuts amid firm confidence that the Eurozone inflation will sustainably return to the desired rate of 2% this year and fears of a slowdown due to potential US tariffs.
Technical Analysis: EUR/USD climbs above 1.0900
EUR/USD jumps above 1.0900 on Tuesday. The major currency pair strengthened after a decisive breakout above the December 6 high of 1.0630 last week. The long-term outlook of the major currency pair is bullish as it holds above the 200-day Exponential Moving Average (EMA), which trades around 1.0640.
The 14-day Relative Strength Index (RSI) jumps to near 75.00, indicating a strong bullish momentum.
Looking down, the December 6 high of 1.0630 will act as the major support zone for the pair. Conversely, the psychological level of 1.1000 will be a key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 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.
