- Euro rebounds from lows near 1.0840 vs. the US Dollar.
- Stocks in Europe en route to close another sesssion of losses.
- EUR/USD drops to multi-week lows in the 1.0845/40 band on Friday.
- The USD Index (DXY) advances to new highs near 103.70.
- No surprises from EMU final inflation figures in July.
- The US calendar appears empty at the end of the week.
The Euro (EUR) is currently trading within a narrow range against the US Dollar (USD), resulting in EUR/USD hovering around the 1.0870 level. This is happening amidst uncertain market trends on Friday, which are affecting risk-related assets as well as the Greenback.
Meanwhile, the Greenback is maintaining a stable position, although its recent rally seems to have encountered resistance near 103.60 (August 16) as indicated by the USD Index (DXY). The Dollar’s loss of momentum can also be attributed to a corrective decline in US yields across various maturity periods, while German 10-year bund yields have also reached multi-day lows.
In terms of monetary policy, there is renewed discussion about the Federal Reserve’s commitment to maintaining a tighter policy stance for an extended period. This is driven by the resilience of the US economy, despite some easing in the labor market and lower inflation readings in recent months.
Within the European Central Bank (ECB), there are disagreements among its Council members regarding the continuation of tightening measures after the summer. These disagreements have led to renewed weakness in the Euro.
In terms of economic data, the only notable release was the final Inflation Rate in the broader euro area, which rose by 5.3% in the year to July, and 5.5% YoY for the Core reading.
Daily digest market movers: Euro keeps the offered stance so far
- The EUR trades without a clear direction vs. the USD at the end of the week
- Investors remain worried about China’s sluggish recovery.
- Inflation in Japan came in above estimates for the month of July.
- Retail Sales in the UK missed expectations during last month.
- The persistent Fed’s tighter-for-longer narrative keeps markets cautious.
- Inflation in the euro area remains sticky and well above the ECB’s target.
Technical Analysis: Euro clings to the positive outlook above the 200-day SMA
In case of further losses, EUR/USD could retest the July low of 1.0833 (July 6) ahead of the significant 200-day SMA at 1.0790, and eventually the May low of 1.0635 (May 31). Deeper down, there are additional support levels at the March low of 1.0516 (March 15) and the 2023 low at 1.0481 (January 6).
Occasional bullish attempts, in the meantime, are expected to meet initial hurdles at the August high at 1.1064 (August 10) prior to the weekly top at 1.1149 (July 27). If the pair clears the latter, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 (July 18). Once this region is surpassed, significant resistance levels become less prominent until the 2022 high at 1.1495 (February 10), which is closely followed by the round level of 1.1500.
Furthermore, the positive outlook for EUR/USD remains valid as long as it remains above the important 200-day SMA.
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.