EUR/USD Forecast: Euro could stretch higher if it stabilizes above 1.0800

EUR/USD trades above 1.0750 after closing in positive territory on Monday.
Producer inflation data from the US will be watched closely by market participants.
Fed Chairman Jerome Powell is scheduled to deliver a speech later in the day.

Eren Sengezer FXStreet

EUR/USD benefited from the modest selling pressure surrounding the US Dollar (USD) and closed in positive territory on Monday. The pair stays relatively quiet below 1.0800 early Tuesday ahead of key events.

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.

The slight improvement seen in risk mood made it difficult for the USD to find demand at the beginning of the week and allowed EUR/USD to stretch higher. Meanwhile, Federal Reserve Vice-Chairman Philip Jefferson said that he was in favor of maintaining current interest rates until there was evidence of moderation in price pressures, helping the USD limit its losses.

The US Bureau of Labor Statistics will release the Producer Price Index (PPI) data for April later in the session. Markets expect the PPI to rise 0.3% on a monthly basis following the 0.2% increase recorded in March. A stronger-than-forecast monthly PPI increase could provide a boost to the USD and force EUR/USD to turn south. On the other hand, a soft PPI print ahead of Wednesday's Consumer Price Index (CPI) data could trigger a risk rally, hurting the USD and helping EUR/USD gain traction.

Federal Reserve Chairman Jerome Powell is scheduled to deliver a speech at 14:00 GMT. If Powell pushes back against expectations for a policy pivot in September, the market positioning suggests that the USD could outperform its rivals. According to the CME FedWatch Tool, the probability of the Fed leaving the policy rate unchanged in September stands around 40%.

EUR/USD Technical Analysis

1.0790-1.0800 (Fibonacci 50% retracement of the latest downtrend, static level) area forms initial resistance for EUR/USD. In case the pair climbs above that level and starts using is as support, it could target 1.0830 (Fibonacci 61.8% retracement) and 1.0900 (Fibonacci 78.6% retracement) next.

On the downside, supports could be seen at 1.0740-1.0750 (Fibonacci 38.2% retracement, 200-period Simple Moving Average (SMA) on the 4-hour chart), 1.0720 (100-period SMA) and 1.0700 (Fibonacci 23.6% retracement).

Economic Indicator

Fed's Chair Powell speech

Jerome H. Powell took office as a member of the Board of Governors of the Federal Reserve System on May 25, 2012, to fill an unexpired term. On November 2, 2017, President Donald Trump nominated Powell to serve as the next Chairman of the Federal Reserve. Powell assumed office as Chair on February 5, 2018.

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