Market Data 
- EUR/USD surrenders intraday gains after upbeat preliminary Eurozone Q2 GDP and hot German Inflation.
- The ECB may cut interest rates two more times this year.
- The Fed is expected to openly endorse rate cuts in September.
EUR/USD trades flat above 1.0800 in Tuesday’s New York session. The major currency pair surrenders gains driven by better-than-expected Eurozone flash Q2 Gross Domestic Product (GDP). The report showed that the old continent expanded steadily by 0.3%. Investors expected the economy to have grown at a slower pace of 0.2%. Annualized GDP rose by 0.6%, in line with expectations and faster than the former release of 0.4%. This has improved the Eurozone’s economic outlook and the Euro’s appeal.
On the contrary, preliminary German Q2 GDP unexpectedly contracted by 0.1%, while economists forecasted an expansion at a similar pace. In the previous quarter, the Eurozone’s largest economy grew by 0.2%. Annualized GDP contracted by 0.1% though it was expected to remain unchanged. The German administration is already worried about the poor demand environment. Therefore, German Finance Minister Christian Lindner announced tax relief for corporate and households to spurt spending and investment.
Meanwhile, the preliminary German Harmonized Index of Consumer Prices (HICP) for July has turned out hotter than expected. Momthly HICP grew strongly by 0.5% from the estimates and the former release of 0.2%. The annual HICP unexpectedly accelerated to 2.6% from the former reading of 2.5%. Economists forecasted a deceleration to 2.4%.
This week, the major trigger for the Euro will be the preliminary Eurozone HICP for July, which will be published on Wednesday. The inflation data will indicate whether current market speculation that the European Central Bank (ECB) will cut its key borrowing rates two more times this year is appropriate. The ECB initiated its policy-easing cycle in June but didn’t cut interest rates sequentially in July as policymakers worry that an aggressive expansionary stance could lift price pressures again. Annually, headline and core HICP, which excludes volatile items like food, energy, alcohol, and tobacco, are estimated to have decelerated to 2.4% and 2.8%, respectively.
Daily digest market movers: EUR/USD trades flat as US Dollar consolidates with Fed policy in focus
- EUR/USD trades sideways in Tuesday’s North American trading hours, while the US Dollar (USD) stays in a tight range amid uncertainty ahead of the Federal Reserve’s (Fed) monetary policy announcement on Wednesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, consolidates around 104.70.
- The Fed is expected to leave interest rates unchanged in the range of 5.25%-5.50% for the eighth consecutive meeting. It is anticipated to be the last steady interest rate decision, and the Fed will pivot to policy normalization starting from the September meeting.
- According to the CME FedWatch tool, 30-day Federal Fund futures pricing data shows that the central bank will reduce interest rates by 25 basis points (bps) from their current levels in the September meeting. The data also shows that there will be two more rate cuts before year end instead of one as projected by Fed’s policymakers in the latest Fed dot plot.
- Market experts see the Fed acknowledging the return of inflation on the path towards the bank’s target of 2% and some progress, too, along with upside risks to labor market strength. This would indicate the Fed’s readiness to unwind the more than two-year-long policy-tightening framework.
- This week, investors will also focus on a slew of economic data. In Tuesday’s session, investors will focus on JOLTS Job Openings data for June, which will be published at 14:00 GMT. The number of job vacancies posted by employers is estimated to have declined to 8.03 million from the former release of 8.14 million.
Technical Analysis: EUR/USD trades below 20-day EMA
EUR/USD trades inside Monday’s trading range and holds key support of 1.0800. The shared currency pair remains inside a Symmetrical Triangle pattern on a daily timeframe after failing to hold the breakout. The major currency pair settles below the 20-day Exponential Moving Average (EMA), which trades around 1.0840.
The major could slide further towards round-level supports near 1.0800 and 1.0700. On the upside, the round-level resistance of 1.0900 will be a key barrier for the Euro bulls.
The 14-day Relative Strength Index (RSI) returns within the 40.00-60.00 range, suggesting the bullish momentum has faded.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
