- The Euro nudges higher with the US Dollar weighed in heightened hopes of Fed cuts in March.
- A softer-than-expected US PPI on Friday sent the US Dollar lower across the board.
- Trading is light on Monday, with US markets closed on bank holiday.
The Euro (EUR) has opened the week on a moderately positive tone, with a mild appetite for risk prevailing in the European session. Trading volumes are expected to remain subdued, as US markets are closed for Martin Luther King’s birthday, and the Eurozone industrial production is the only data worth mentioning today.
The US Dollar remains on the defensive, with the Dollar Index (DXY) unable to put a significant distance from late December lows. The inflation data released last week has failed to ease investors’ hopes that the Federal Reserve (Fed) will slash interest rates aggressively this year, starting with a 25 bps rate cut in March.
Traders welcomed December’s unexpected decline of the US Producer Prices Index (PPI), increasing their bets for Fed easing and ignoring the uptick in the CPI figures and Fed officials’ warnings about excessive optimism. US Treasury Yields retreated, with the benchmark 10-year yield dipping below the 4% level, and the US Dollar eased, to close the week practically flat.
This week, the focus will be on the Eurozone Consumer Price Index (CPI) and US Retail Sales data. These figures will give further insight into the Eurozone and US economic outlook and might help the EUR/USD to break the horizontal range that is constraining price action.
Daily digest market movers: Euro maintains a mildly positive tone in risk-on environment
- The Euro is ticking up on a calm session on Monday with hopes of Fed cuts weighing on the US Dollar.
- Eurozone Industrial Production contracted at a 0.3% pace, as expected in December. Year-on-year, production declined 6.8%, well beyond the 5.9% expected.
- US PPI declined 0.1% in December on month, against expectations of a 0.1% increase, which has revived hopes of Fed cuts in March.
- The CME Group FedWatch Tool shows a more than 70% chance that the Fed will lower interest rates in March and a 75% possibility of another rate cut in May.
- Investors have ignored the uptick in the CPI and Fed officials’ comments affirming that it is still too early for rate cuts.
- European Central Bank (ECB) President Christine Lagarde showed an unprecedented bearish tone on Friday signaling the end of interest rate hikes, which is weighing on Euro bulls.
- ECB Board member and Governor of the Bank of Ireland, Philip Lane, has discarded any rate cut until June in an interview over the weekend. This has given some support to the Euro.
- In the Eurozone calendar on Wednesday, Eurostat is expected to confirm that the CPI accelerated to 2.9% year-on-year in December from 2.5% in November, while the Core inflation eased to a 3.4% yearly pace from the previous 3.6% rate.
- Also on Wednesday, US Retail Sales are expected to have increased in December, which might limit the US Dollar weakness.
Technical Analysis: EUR/USD maintains the broader positive trend
The EUR/USD keeps trading within a narrow range on Monday, with price action trapped between the 4-hour 100 and 200 SMAs, with the RSI flattening around the 50 level, which suggests a lack of clear direction.
The broader trend, however, remains positive, with price action reflecting higher highs and higher lows. Immediate support remains at 1.0930, where the 4-hour 200 SMA meets the price. Below here, the trendline support from early November lows, now around 1.0900, and the January 5 low at 1.0875 are likely to challenge bears.
On the upside, the pair needs to breach a strong resistance at 1.1000, where the pair has printed a double top. This level is closing the path toward a minor resistance at 1.1075, ahead of December’s peak at 1.1145.
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.
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.
