- EUR/USD bounces on broad US Dollar selling after the Chinese PBoC decides to fix the Renminbi higher on Monday.
- Profit-taking after the deep declines at the end of last week could be another factor.
- Dovish ECB commentary fails to move the pair on Monday morning.
EUR/USD is trading over two tenths of a percent higher at the start of the week, in the lower 1.0800s, due to a combination of factors, including broad US Dollar (USD) selling after the People’s Bank of China (PBoC) fixed the Renminbi surprisingly higher on Monday morning, according to Bloomberg News.
Although it is up on the day, the pair appears to be in a new short-term downtrend and is now firmly below the 200-day Simple Moving Average (SMA) at 1.0838, the last key MA obstructing further downside.
EUR/USD bounces on profit-taking after sell-off
EUR/USD is bouncing on Monday due also perhaps to profit-taking. The pair suffered a substantial decline at the end of last week, following the release of Eurozone and US flash PMI data that highlighted US exceptionalism.
The data suggested the US economy is still doing pretty well and the Federal Reserve (Fed) may be being too hasty in expecting to make three interest-rate cuts this year. If the Fed changes its mind and cuts rates more slowly, it will be positive for the US Dollar since higher rates tend to attract greater inflows of foreign capital.
Despite Monday’s bounce, the Euro remains “fragile” to further weakness, according to analysts at ING, who think the surprise Swiss National Bank (SNB) decision to cut its interest rates on Thursday has stimulated “increased scrutiny of ECB communication,” for signs the European bank will follow suit. The ECB and SNB have a history of mimicking each other, although it is normally the SNB which follows the ECB, not the other way around.
“Following last week's surprise cut from the Swiss National Bank, there has been increased scrutiny on ECB communication. This remains mixed, with one hawk on Friday still talking up the chances of an April rate cut. Notably, money markets still ascribe a very low probability to such an outcome and we doubt that changes much this week given the absence of key data,” said ING in a recent note.
ING still sees a low probability of an early interest rate cut by the ECB, however, and volatility is likely to be minimalized by the lack of key data out for the Euro this week and the upcoming Easter holidays.
The Federal Reserve Bank of Atlanta President Raphael Bostic is also scheduled to speak later in the day at 13:45 GMT, and is followed by the Federal Reserve member of the Board of Governors Lisa Cook at 14:30 GMT.
On the data front, US New Home Sales and the Chicago Fed National Activity Index will be released on Monday.
EUR/USD remains bid despite ECB official's dovish comments
EUR/USD shrugged off comments from several ECB board members on Monday that pointed to early interest rate cuts.
ECB Executive Board Member Fabio Panetta said that inflation was quickly falling to target and therefore there was a "consensus emerging" for a rate cut. His comments increase the probability of a June-or-earlier rate cut. An earlier cut in rates would be considered bearish for the Euro as lower interest rates attract less flows of foreign capital.
ECB Chief Economist Philip Lane said on Monday he was "confident" that wage inflation was "on track" to falling to a level consistent with the ECB meeting their 2% inflaiton target, a further indicator that rate cuts are imminent.
Technical Analysis: EUR/USD makes lower lows
EUR/USD seems now to be in a short-term downtrend after making lower lows on Friday, and since the “trend is your friend” this, on balance, favors bearish bets.
Euro versus US Dollar: 4-hour chart
EUR/USD has fallen to the low of wave B of the three-wave Measured Move pattern that unfolded higher during February and early March. This is likely to be a key support level and may see some stabilization of the exchange rate after the past week’s heightened volatility.
A decisive break below the B-wave lows at roughly 1.0795 would signal a continuation of the downtrend to the next target at 1.0750, possibly even the February lows at 1.0700.
A decisive break is one characterized by a long red bearish candle that breaks cleanly through the level and closes near its low, or three down candles in a row that breach the level.
Alternatively, a move above the 1.0950 level would bring into question the validity of the short-term downtrend.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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