- EUR/USD rebounds and returns around 1.0500 as the US Dollar resumes its corrective trend triggered after Trump nominated Bessent for US Treasury Secretary.
- ECB policymakers support reducing interest rates gradually to abate risks of inflation becoming persistent.
- This week, investors will focus on US PCE inflation for October and Eurozone flash HICP data for November.
EUR/USD recovers intraday losses and tests region above the psychological figure of 1.0500 in Tuesday’s North American session. The major currency pair bounces back after a weak opening as the US Dollar (USD) surrenders its daily gains.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, started strongly and raised to near 107.50 in the early Asian session but surrenders most of its gains and declines to near 106.50 during North American trading hours.
Renewed fears boosted the US Dollar’s (USD) appeal in Tuesday’s Asian session after President-elect Donald Trump threatened to raise tariffs on other North American economies from where he expects China to have poured illicit drugs into the United States (US). Trump said he would impose 25% tariffs on Mexico and Canada and an additional 10% on China to the 60% already mentioned in his election campaign.
The US Dollar resumes its corrective trend, which started on Monday after Trump nominated seasoned hedge fund manager Scott Bessent for the role of Treasury Secretary. The USD fell sharply as investors anticipated Bessent to fulfill the economic agenda by maintaining fiscal discipline and political steadiness.
Going forward, investors will focus on the Federal Open Market Committee (FOMC) Minutes for the monetary policy meeting on November 7, which will be published at 19:00 GMT. In the November policy meeting, the Fed reduced its key borrowing rates by 25 basis points (bps) to the 4.50%-4.75% range.
This week, investors will also focus on the US Personal Consumption Expenditure Price Index (PCE) data for October, which will be released on Wednesday. The inflation data will influence market speculation for the Federal Reserve (Fed) interest rate action in the December meeting. Traders are divided over whether the Fed will cut interest rates by 25 bps or leave them at their current levels next month, according to the CME FedWatch tool.
Daily digest market movers: EUR/USD bounces back despite growing risks to Eurozone economy
- EUR/USD manages to recover intraday losses and turn positive on Tuesday. Still, investors expect the major currency pair to remain on the backfoot as European Central Bank (ECB) policymaker and President of Bundesbank Joachin Nagel cited concerns over economic weakness in the Eurozone’s largest economy, Germany, in his speech on Monday, Reuters reported.
- "Germany is stuck in a period of economic weakness which has now lasted two and a half years," Nagel said. He added, "Stagnation is likely in the final quarter of this year," and warned that the economy could fall behind other nations of the bloc.
- Despite citing fears over growth, Nagel supported gradually reducing interest rates to ensure inflationary pressures get fully tamed. "It is important to remain cautious and to loosen monetary policy only gradually and not too quickly," Nagel said.
- Also, ECB Chief Economist Philip Lane praised the bank’s gradual policy-easing action in an interview with French newspaper Les Echos on Monday. Lane said that inflation is still higher than where the ECB wants it to be as a major decline in price pressures has come from moderation in energy costs, while inflation in the services sector is still too high.
- In the European session. ECB policymaker and Portuguese central bank chief Mario Centeno warned about the risk of inflation undershooting the bank's target if the restrictive policy stance remains for too long, according to RTE News. Centeno added that the economy was stagnating and "risks are accumulating downwards" with tariffs threatened by Trump a further downside risk.
- To know the current status of inflation in the Eurozone and its major economies, investors will focus on the flash Harmonized Index of Consumer Prices (HICP) data for November, which will be published on Thursday and Friday. Economists expect the Eurozone’s headline and core HICP – which excludes volatile components like food, energy, tobacco, and alcohol – to have accelerated to 2.4% and 2.9%, respectively, on year.
Technical Analysis: EUR/USD rises above 1.0500
EUR/USD regains strength and bounces back above 1.0500 in Tuesday’s North American session. The major currency pair continues to hold the near-term low of 1.0330. However, the outlook remains bearish as all short-to-long-term Exponential Moving Averages (EMAs) in the daily chart are declining, pointing to a downside trend.
The 14-day Relative Strength Index (RSI) rebounded after conditions turned oversold. However, the oscillator has cooled down, which could allow bears to take charge again.
Looking down, the November 22 low of 1.0330 will be the key support. On the flip side, the November 20 high round 1.0600 will be the key barrier for the Euro bulls.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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