- EUR/USD declines on Thursday as the Euro weakens on the back of a worsening growth outlook.
- A stronger US Dollar is speeding its ascent amid falling market bets of another aggressive rate cut from the Fed.
- USD is further strengthening from haven flows as the conflict in the Middle East intensifies.
EUR/USD trades in the 1.1030s on Thursday, marginally down on the day as geopolitical risks increase demand for the safe-haven US Dollar (USD) while the Euro (EUR) weakens amid a gloomy economic outlook for the old continent.
EUR/USD slides on tighter Fed, haven flows
EUR/USD opens Thursday on the back foot after closing lower for three consecutive days. A single Euro now will buy almost two cents less than it did at the start of the week.
The Euro is weakening after lower-than-expected inflation data for September brings the official headline rate of inflation in the Eurozone to 1.8%, the first time it has fallen below the European Central Bank’s (ECB) target of 2.0% in 39 months. The data increases the chances the ECB will cut interest rates more aggressively, which, in turn, would be negative for the Euro as it discourages foreign capital inflows.
In the US, conversely, market bets are falling that the US Federal Reserve (Fed) will follow up their “jumbo” 50 basis points (0.50%) cut with an equal-sized cut in November, and this is supporting the US Dollar.
Strong US jobs data is helping to reassure investors that the US economy will not experience a hard landing. JOLTS Job Openings rose to 8.04 million in August from a revised-up 7.71 million in July, and ADP Employment Change – an estimate of private payrolls growth – came out at 142K in September, beating the previous month’s 103K and expectations of 120K. Markets now await the US’s most important labor report, the Nonfarm Payrolls (NFP) scheduled for release on Friday.
Rising geopolitical tensions in the Middle East further support the US Dollar because the Greenback is viewed as a safe-haven in times of crisis, further weighing on the EUR/USD pair. Israel has stepped up its multi-front war against Iran and its proxies – Hamas, Hezbollah and the Houthi of Yemen. After Iran’s bombardment of Israel on Tuesday, fears are increasing that Israel will retaliate with targeted attacks on Iranian Oil installations and possibly even nuclear development sites.
Europe faces an uncertain future
The Euro is suffering because of a pessimistic longer-term economic growth outlook for Europe. On Wednesday, these concerns crystallized in a speech that President Emmanuel Macron of France gave in Berlin. Macron warned about the existential risks for Europe if it failed to invest in its future in order to stay competitive in a rapidly changing new world order headed by the United States and China.
Europe, he said, was facing “an existential risk” unless it increased investment in innovation and Artificial Intelligence (AI), imposed tariffs to ensure a level playing field with subsidy-backed competitors, simplified complex regulation and integrated member states at a capital market and governance level. His speech echoed proposals made by former Prime Minister of Italy Mario Draghi in his recent report on EU competitiveness, which was similarly pessimistic in its conclusions.
Technical Analysis: EUR/USD continues descent within long-term range
EUR/USD continues unfolding a down leg within a broad multi-year range capped by a ceiling at roughly 1.1200 and a floor at about 1.0500.
EUR/USD Daily Chart
The pair is in a sideways trend on all its key timeframes (short, medium, and long-term) and since it is a principle of technical analysis that “the trend is your friend,” the odds favor a continuation of this sideways trend, suggesting an elongation of the down leg currently unfolding.
Prices are currently trying to penetrate below support provided by the red 50-day Simple Moving Average (SMA) at 1.1044. A close below the 50-day SMA would help confirm more weakness. A close below the trendline and the September 11 swing low at 1.1002 would provide further bearish confirmation. The downside target for the leg currently unfolding is 1.0875, the 200-day SMA, followed by 1.0777 (August 1 low) and 1.0600 in an especially bearish scenario.
Momentum, as measured by the Moving Average Convergence Divergence (MACD), is relatively bearish as the blue MACD line has crossed below the red signal line, suggesting more evidence the pair could be vulnerable to further weakness.
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.
