EUR/USD Forecast: Euro inches higher with one-month lows on sight
- EUR/USD trades at 1.1650 after retreating from 1.1700 earlier this week.
- The US Dollar remains firm despite moderate US inflation figures.
- US Retail Sales, Fed speakers, and the Supreme Court rulings are due later on Wednesday.
EUR/USD is ticking up on Wednesday, trading near 1.1650 at the time of writing, but lacks momentum to take distance from the one-month lows in the 1.1615 area. The US Dollar maintains a moderate bullish bias, despite the moderate inflation figures released on Tuesday.
The US Consumer Price Index (CPI) grew at a steady 0.3% pace in December and 2.6% over the previous 12 months, in line with market expectations. The Core CPI, however, slowed to 0.2% from 0.3% the previous month and grew at a steady 2.6% annual pace, against market expectations of 0.3% and 2.7% increases, respectively.
The market reaction was limited. Price pressures remain well above the Federal Reserve’s (Fed) 2% target for price stability, and apart from that, the weekly ADP report hinted at a moderate pick-up in employment. Futures markets are practically fully pricing a steady monetary policy decision in the late-January meeting, and the chances of a rate hike in March have dropped to 26% from nearly 40% one week ago.
Market volatility has remained subdued during Wednesday's Asian session. The calendar in Europe is void, apart from a speech of the European Central Bank’s Vice-President, Luis De Guindos. In the US, Retail Sales data and an array of Fed speakers will be in focus. The US Supreme Court, however, might steal the show in case of a ruling against US President Donald Trump’s tariffs.
Technical Analysis
The EUR/USD pair trades at 1.1650 after pulling back from the 1.1700 area earlier this week, with technical indicators neutral to bearish. The Moving Average Convergence Divergence (MACD) is practically flat, showing a lack of momentum, while the Relative Strength Index (RSI) prints 43, signaling subdued demand.
Price action remains trapped within a descending channel from late December highs. The intraday low is near 1.1635, a few pips above the one-month low of 1.1618 hit last week. The channel bottom is at the 1.1600 area. Immediate resistance stands at the channel top, now around 1.1685, ahead of Monday's high, near 1.1700. Further up, the target is the January 6 high, in the area of 1.1740.
(The technical analysis of this story was written with the help of an AI tool.)
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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Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
