Market Data 
- EUR/USD has fallen to the 1.0800s, close to a critical level for the short-term trend.
- Further weakness could tip the near-term outlook in favor of bears.
- Empire State Manufacturing, Michigan Sentiment, US Industrial Production and commentary from ECB’s Nagel round off the week.
EUR/USD is trading in the 1.0800s on the last day of the week after taking a step down from its previous range in the 1.0900s. The catalyst seems to be a mixture of better-than-expected US macro data and ECB’s chief economist Philip Lane pushing back on early rate-cut expectations.
US data on Friday in the main built on Thursday’s gains. Industrial Production came out at 0.1% in February, beating economists expectations of flat growth. The Export Price Index rose by 0.8%, easily beating the 0.2% forecast and further adding to the inflationary narrative. UoM 5-year Consumer Inflation Expectations came out at 2.9% the same as previous.
Not all US data was positive, however, as the Michigan Consumer Sentiment Index in March came out at 76.5, which was slightly below expectations and the previous 76.9 figure. The NY Empire State Manufacturing Index came out lower than expected at negative 20.9 when minus 7 had been forecast from negative 2.4 previously.
The data has moderated expectations in favor of the Federal Reserve (Fed) keeping interest rates higher for longer, which is negative for EUR/USD but positive for the US Dollar (USD), since higher interest rates attract greater inflows of foreign capital.
EUR/USD: Talking heads at ECB cluster around summer
A long line-up of European Central Bank (ECB) policymakers have recently appeared in public with to share their views about when the ECB should start cutting interest rates.
The official line, provided by Christine Lagarde at the press conference following the March ECB meeting, was that the Governing Council would review interest rates in June.
Following the meeting, however, Governor of the Bank of France Francois Villeroy de Galhau stirred up markets by hinting that an interest-rate cut might come as early as April.
His comments suggested that two camps might be forming at the ECB, favoring either a spring or summer rate cut.
On Wednesday, the Governor of the Bank of Austria and ECB Governing Council member Robert Holzmann joined the June camp.
Early Thursday ECB Governing Council member Yannis Stournaras seemed to back the case for a spring rate cut, adding that he didn’t buy the argument that the ECB could not cut rates before the Fed, and that four rate cuts in 2024 seemed reasonable.
Also on Thursday, ECB Governing Council member Klaas Knot said he believed the ECB would start cutting interest rates in June.
Vice-President of the ECB Luis de Guindos, speaking in Barcelona on Thursday, said “The ECB should have sufficient information in June to begin making decisions about monetary policy,” according to Bloomberg News.
Technical Analysis: EUR/USD reaches critical trend-determination level
EUR/USD continues correcting back, falling into the 1.0800s, after peaking at 1.0981 on March 8.
After Thursday’s sell-off, the correction is now so deep it brings into question the sustainability of the hitherto dominant short-term uptrend.
Euro vs US Dollar: 4-hour chart
Bears have now pushed price down to a few pips above the pivotal 1.0867 level of the previous key swing low, highlighted as the make-or-break level for the trend. Should they push price below this level it would start to shift the balance of probabilities in favor of a reversal of the uptrend.
Such a breakdown would then most probably see a continuation down to 1.0795, at the low of the B leg of the prior ABC Measured Move pattern that unfolded higher during February and early March.
Alternatively, if the level holds, the short-term uptrend could resume. Confirmation of a higher high and an extension of the uptrend would come from a break above the 1.0981 highs.
After that, tough resistance is expected at the 1.1000 psychological level, which is likely to be the scene of a fierce battle between bulls and bears.
A decisive break above 1.1000, however, would open the gates to further gains towards the key resistance level at 1.1139, the December 2023 high.
By “decisive” it is meant a break characterized by a long green candle piercing clearly above the level and closing near its high, or three green bars in a row, breaching the level.
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.
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