- EUR/USD bounces after test of 1.0500 on Thursday, the lowest level in over a year.
- Euro recovers on Friday against the US Dollar due to profit-taking after a five-day losing streak.
- Markets turn nervous on the Fed putting the December rate cut in doubt, while the ECB is expected to continue easing, pointing to more downside for the EUR/USD.
EUR/USD recovers on Friday after a brief test of the 1.0500 level the prior day, erasing Thursday’s incurred losses. The pair has eased nearly 1.5% so far this week as markets have priced in more Trump trade effects. That move is now facing some profit-taking after a five-day losing streak for the Euro against the Greenback. All pieces of the puzzle are now in, with potentially EUR/USD starting to trade sideways in a range until President-elect Donald Trump takes office in January.
The EUR/USD recovery on Friday looks to be triggered by some profit-taking after the steep decline this week. Economic data from France released earlier in the day showed that inflation, as measured by the Harmonized Consumer Price Index (HCPI), came a touch higher than the preliminary reading for October. However, this may not change the dovish stance of the European Central Bank (ECB), which is set to cut its policy rate in its upcoming policy meeting in December.
On Thursday, Federal Reserve (Fed) Chairman Jerome Powell joined the camp of members within the Fed that deem another rate cut in December, however, it is not granted. Powell pointed out that the US economy and job markets are still doing very well. Meanwhile, several analysts and economists have warned of exponential inflation in the US should President-elect Donald Trump roll out all his fiscal stimulus packages for both US companies and households, alongside slapped tariffs on China and Europe.
Daily digest market movers: EUR/USD higher ahead of US Retail Sales
- Japanese indices closed off rather flat to positive on Friday, while Chinese equities faced weekly losses.
- France’s final reading for the October inflation figures came in a touch higher than expected. The HCPI rose by 1.6% year-over-year (YoY), compared to the 1.5% previously reported and expected. The monthly HCPI came in at 0.3%, as expected.
- There is some good news on the economic data front from China, where Retail Sales surged 4.8% YoY in October, beating the lower expectation of 3.8%.
- All eyes will be on the US Retail Sales data for October on Friday, with the headline number expected to show 0.3% compared to 0.4% in September. As always, markets will move more on the revisions than on the actual number.
Technical Analysis: Fundamentals limit upside scenario’s
EUR/USD slightly recovers on Friday, with some profit-taking during the European trading session after five consecutive trading days in the red. Pure fundamentally, much upside for EUR/USD is not expected after Fed Chairman Powell dampened hopes for an interest rate cut in December, while recent French inflation figures may not change the ECB’s dovish stance. The rate differential between the two contents will become wider if the Fed does not cut and the ECB does at their next meetings in December, which is oil on the fire in favour of more downside in EUR/USD by the end of the year.
On the upside, three firm lines in the sand can be seen. First up is the previous 2024 low, registered on April 16 at 1.0601. If that level breaks, the triple bottom from June at 1.0667 will be the next cap upwards. Further up, the 1.0800 round level, which roughly coincides with the green ascending trend line from the low of October 3, 2023, could deliver a harsh rejection before having more downside in EUR/USD.
Looking for support, the 2023 low at 1.0448 is the next technical candidate. That would mean that once tested, a fresh two-year low is in the cards. Further down, a wider area could open up with 1.0294 as the next level to consider.
EUR/USD: Daily Chart
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
