EUR/USD penned in as traders await US CPI data
|- EUR/USD is captive to a range as traders await the next market mover, the US CPI data on Wednesday.
- US inflation expectations are high while US Treasury yields have made a new high for the year.
- The pair is trading within a narrow range between the 50, 100 and 200-day Simple Moving Averages.
EUR/USD trades penned in, seesawing between tepid gains and losses in the 1.0860s on Tuesday. The lack of volatility could be due to many traders opting to stay on the sidelines ahead of the first big market mover for the week, the US Consumer Price Index (CPI) inflation data for March, scheduled for Wednesday.
EUR/USD traders withdraw to patiently await inflation data
EUR/USD will likely not see much volatility until the release of CPI. Economists expect the data to show that prices in the US to have risen by 3.4% Year-on-Year in March (3.7% YoY for core goods), both of which are still well above the Federal Reserve’s (Fed) 2.0% target. A more substantial decline is required before the Fed will likely bring down interest rates from their current 5.5% level.
For EUR/USD, the maintenance of higher interest rates in the US compared to the Eurozone is a bearish headwind. This is because relatively higher interest rates favor foreign capital inflows.
In contrast to the Fed, the European Central Bank (ECB) is seen as more likely to cut interest rates earlier amid more subdued growth and inflation expectations.
US Treasury Yields reach Year-to-Date Peak
US Treasury yields, a key gauge of US inflation expectations, peaked on Monday, with the 10-year Treasury Note yield reaching YTD highs of 4.46%. US yields are highly correlated to the US Dollar and, therefore, negatively correlated with the EUR/USD pair. Since peaking on Monday, they rolled over and have been trending slightly down.
US inflation expectations increased after the stellar Nonfarm Payrolls (NFP) jobs report released on Friday, which showed another 303K workers joining the economy in March.
More people working usually means more people earning and spending money. This ought to be negative for EUR/USD, however, the pair has been broadly rising over the past five days.
The release of better-than-expected German Industrial Production data on Monday may have helped the Euro at the start of the new week.
German yields are rising faster than US yields according to Gregor Horvat of advisory firm Wavetraders, which may explain why EUR/USD keeps going higher despite the strong US data.
Horvat uses Elliott Wave analysis, a type of cycle theory, and expects EUR/USD to continue its rally up to 1.0920 before the ECB meeting on Thursday.
Technical Analysis: EUR/USD increasingly looking range-bound
EUR/USD looks increasingly range-bound in the short-term.
The pair failed to confirm the bearish Gravestone Doji candlestick posted on Thursday as price recovered on the following day and posted a bullish Dragonfly Doji candlestick – the one canceling out the other (shaded rectangle on chart).
EUR/USD Daily Chart
EUR/USD now appears trapped within the pincers of three significant Moving Averages. The 50-day and 200-day SMAs are providing cushioning support at 1.0830 and 1.0831 and the 100-day SMA is showing resistance at 1.0873.
A decisive break above the 100-day SMA would support the bullish case, and see a rally to perhaps the March 21 high at 1.0942.
Alternatively, a decisive break below the cluster of MAs in the 1,0830s might see a pullback evolve down to support at the April 2 swing lows of 1.0725.
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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