- EUR/USD gives a tough fight to psychological resistance of 1.0500 as the outlook of the US Dollar is uncertain.
- ECB’s Panetta is worried about growing risks of inflation undershooting the 2% target.
- US President Donald announced on Friday that he plans to impose tariffs on imported cars.
EUR/USD struggles to extend its upside move above the psychological resistance of 1.0500 in Monday’s European session. The major currency pair is broadly sideways as investors assess the likely impact of United States (US) President Donald Trump’s tariffs on the Eurozone.
On Friday, President Trump announced that he plans to impose tariffs on imported cars around April 2. Reciprocal tariffs are also planned in the same period.
Market participants expect the major impact of levies on autos will be on Germany, Japan, and South Korea, which are leading exporters of cars to the US. According to OEC data, the German economy exported $24.3 billion worth of vehicles to the US in 2023.
Over the weekend, European Central Bank (ECB) policymaker and Governor of Bank of Italy Fabio Panetta said in a speech at Italy’s annual Assiom-Forex financial conference that the net effect of the tariffs on inflation in Eurozone would be “limited, if not slightly negative”.
Panetta’s views are based on the assumption that potential weakness in the Euro (EUR), due to higher US tariffs and any retaliation from Europe, would be countered by a global economic slowdown and China dumping goods hit by the tariffs into European markets.
Fabio Panetta guided a dovish monetary policy outlook, arguing that the predominant risk for the old continent is “inflation falling below the 2% target over the medium term.”
Daily digest market movers: EUR/USD struggles as US Dollar gains ground temporarily
- EUR/USD faces pressure to extend last week’s strength as the US Dollar (USD) is cautiously steady near its fresh two-month low, posted on Friday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades near 106.80.
- The USD Index witnessed a sharp sell-off on Friday after the release of the poor US Retail Sales data for January. The Retail Sales data, a key measure of consumer spending, declined at a faster pace of 0.9% in the month. Economists expected the consumer spending measure to have contracted by 0.1%.
- The outlook for the US Dollar was already bearish as fears of immediate reciprocal tariffs by President Trump had waned. On Thursday, Donald Trump asked the Commerce and Treasury Department to prepare a reciprocal tariff plan. However, investors anticipated that Trump would unveil the detailed reciprocal tariff plan immediately.
- These expectations were based on Trump’s tweet on Truth Social, “Three great weeks, perhaps the best ever, but today is the big one: reciprocal tariffs!!! Make America great again!!!”, which came in early North American trading hours on Thursday.
- This week, the US Dollar will be influenced by speeches from a slew of Federal Reserve (Fed) officials who will guide the monetary policy outlook. On the economic front, investors will focus on the preliminary S&P Global Purchasing Managers Index (PMI) data for February, which will be released on Friday.
Technical Analysis: EUR/USD faces resistance near 1.0500
EUR/USD struggles to break above the key resistance of 1.0500 in European trading hours on Monday. The outlook of the major currency pair has turned bullish as it holds above the 50-day Exponential Moving Average (EMA), which stands at around 1.0430.
The 14-day Relative Strength Index (RSI) advances to near 60.00. A bullish momentum would be activated if the RSI (14) manages to sustain above that level.
Looking down, the February 10 low of 1.0285 will act as the major support zone for the pair. Conversely, the December 6 high of 1.0630 will be the key barrier for the Euro bulls.
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.
