- EUR/USD rises to near 1.0770 as the first round of France’s legislative elections showed the far-right dominance, but by a small margin.
- The US Dollar declines as the expected fall in the US core PCE boosts Fed rate cut bets.
- Investors await the preliminary German HICP and US ISM Manufacturing PMI for June.
EUR/USD gains 0.50% and jumps to more than a two-week high near 1.0770 in Monday’s European session. The major currency pair strengthens as exit polls of the first round of France’s parliamentary elections on Sunday showed that Marine Le Pen’s far-right National Rally (RN) is in a comfortable position but with a smaller margin than projected and a significant correction in the US Dollar (USD).
The uncertainty over RN gaining an absolute majority has significantly improved the Euro’s appeal. “We might actually get less fears of more expansionary and unsustainable fiscal policy if the far-right party did a little bit worse,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Now, investors will turn to the second-round runoffs, scheduled for July 7.
On the monetary policy front, investors look for cues about whether the European Central Bank (ECB) will deliver subsequent rate cuts. The ECB started reducing interest rates in early June after maintaining a restrictive interest rate stance for two years to tame price pressures prompted by pandemic-led stimulus.
In Monday’s session, the major trigger for the Euro will be the preliminary German Harmonized Index of Consumer Prices (HICP) data for June, which will be published at 12:00 GMT. Economists expect annual HICP in the Eurozone’s largest economy to rise at a slower pace of 2.6% from the prior release of 2.8%. The monthly Consumer Price Index (CPI) is expected to rise at a higher pace of 0.2% from 0.1% in May.
The scenario in which German inflation declines expectedly or at a faster pace will boost expectations of early rate cuts by the ECB, while hot numbers will ease the ECB’s subsequent rate cut hopes.
This week, the major trigger for the Euro will be the preliminary Eurozone’s HICP data for June, which will be published on Tuesday.
Daily digest market movers: EUR/USD moves higher as US Dollar weakens
- EUR/USD surges to 1.0770 as the US Dollar corrects after the expected decline in the United States (US) core Personal Consumption Expenditures Price Index (PCE) data for May cemented expectations of early rate cuts by the Federal Reserve (Fed). The US PCE report showed on Friday that the core PCE inflation data, the Fed’s preferred inflation measure, decelerated expectedly to 2.6% from the prior release of 2.8%.
- According to the CME FedWatch tool, 30-day Federal Fund futures pricing data shows that the probability for rate cuts in September is 63.4%. The data also suggest the Fed is expected to deliver two rate cuts this year against one projected by policymakers in their latest dot plot.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near 105.40.
- This week, the US Dollar is expected to remain highly volatile as various economic data are lined up for release. In Monday’s session, investors will keenly focus on the ISM Manufacturing Purchasing Managers’ Index (PMI) report for June, which will be published at 14:00 GMT.
- Economists expect factory activity to improve to 49.0 in June from the prior reading of 48.7 but remain contracted, as a figure below the 50.0 threshold separates expansion from contraction. However, the preliminary S&P Global PMI report released on June 21 showed that the US Manufacturing PMI rose to a three-month high at 51.7 from May’s reading of 51.3
- In the PMI report, investors will also focus on other sub-components, such as the New Orders Index and Price Paid, which indicate the factory outlook and change in input prices of the manufacturing sector, respectively, and will provide cues about inflation expectations.
Technical Analysis: EUR/USD recovers from upward-sloping border of triangle formation
EUR/USD rebounds after discovering strong buying interest near the upward-sloping border of the Symmetrical Triangle formation on a daily timeframe near 1.0666, which is marked from 3 October 2023 low at 1.0448. The downward-sloping border of the above-mentioned chart pattern is plotted from 18 July 2023 high at 1.1276. The Symmetrical Triangle formation exhibits a sharp volatility contraction, which indicates low volume and narrow ticks.
The major currency pair remains below the 200-day Exponential Moving Average (EMA) near 1.0790, suggesting that the overall trend is bearish.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.
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.
