EUR/USD Forecast: Euro regains traction following correction
- EUR/USD trades in positive territory above 1.1550 in the European session.
- Geopolitical tensions remain high as Iran and Israel exchange missile strikes.
- The Federal Reserve's two-day policy meeting will start on Tuesday.
After closing in negative territory on Friday, EUR/USD started the new week on a firm footing and rose above 1.1550. The technical outlook suggests that the bullish bias remains intact.
Euro FAQs
The Euro is the currency for the 19 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.
Safe-haven flows dominated the action in financial markets on Friday as Israel entered a military conflict with Iran. The US Dollar (USD) held its ground on this development and caused EUR/USD to correct lower.
Over the weekend, Israel and Iran exchanged missile strikes. Although there are no signs of a de-escalation in the conflict, markets don't seem to be as concerned as they were on Friday. On Sunday, United States (US) President Donald Trump called upon Iran and Israel to make a deal. "We will have peace, soon, between Israel and Iran! Many calls and meetings now taking place," he added on Truth Social.
Meanwhile, hawkish comments from European Central Bank (ECB) officials seem to be helping the Euro gather strength against its rivals. ECB policymaker Joachim Nagel said on Monday that current data and forecasts suggest that the ECB has accomplished its mission. Moreover, ECB Vice President Luis de Guindos said that the appreciation of the Euro is not a big obstacle on the inflation target, adding that the risk of undershooting that target is very limited.
The Federal Reserve Bank of New York's Empire State Manufacturing Index will be the only data featured in the US economic calendar on Monday. Investors could ignore this data and refrain from taking large positions before the Federal Reserve announces monetary policy decisions on Wednesday. Nevertheless, a negative shift in risk mood could support the USD in the near term.
EUR/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the 4-hour chart stays above 60 and EUR/USD trades within the upper limit of the ascending regression channel, reflecting the bullish stance.
On the upside, 1.1600-1.1620 (static level, upper limit of the ascending channel) aligns as the first resistance area before 1.1660 (static level) and 1.1700 (round level, static level).
Looking south, the first support level could be spotted at 1.1530-1.1540 (20-period Simple Moving Average (SMA), mid-point of the ascending channel) ahead of 1.1500 (static level, round level) and 1.1460 (50-period SMA).
Euro FAQs
The Euro is the currency for the 19 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
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
