EUR/USD trades lower after robust US jobs data, Eurozone inflation miss

EUR/USD trades on the back foot due to the Euro’s weakness and increasing US Dollar strength.
The Euro depreciated on Tuesday due to lower inflation data; the Dollar benefited from strong jobs data.
An escalation of the conflict in the Middle East has further increased safe-haven flows to USD.

EUR/USD trades lower in the 1.1050s on Wednesday, after falling from 1.1135 on Tuesday, in a sell-off that amounted to a 0.60% one-day decline.

Lower-than-expected Eurozone inflation data was partly responsible for the sharp decline. The bloc’s Harmonized Index of Consumer Prices (HICP) grew by 1.8% YoY in September, down from 2.2% previously and below expectations of 1.9%. Core inflation, meanwhile, came out at 2.7% YoY – one tenth below August’s 2.8% reading and also below expectations.

The data indicates headline inflation has fallen back down below the European Central Bank’s (ECB) 2.0% target, and that core is on its way. It increases the chances that the ECB will cut interest rates further, which, in turn, is likely to lead to capital outflows and a weaker Euro.

Just-released US ADP Employment Change data showed a rise of 143K private payrolls in September, which was above the upwardly-revised 103K in August and expectations of 120K.

The Eurozone Unemployment Rate, released on Wednesday, showed unemployment remained steady at 6.4% in August, which was unchanged from July's figure and in line with economists' expectations.

EUR/USD: declines exacerbated by stronger USD

EUR/USD was also pushed lower after a recovery in the US Dollar (USD) on Tuesday.

The Greenback gained after the release of data showing a higher-than-expected rise in the number of job openings in the US, as measured by JOLTS Job Openings, which rose to 8.04 million in August from a revised-up 7.71 million in July, and beat expectations of 7.66 million.

The data is significant because of the Federal Reserve’s (Fed) recent shift to focusing on concerns around the labor market. This broadly offset weaker US manufacturing activity data as measured by the ISM Manufacturing PMI, which flatlined in contraction territory and missed expectations in September.

EUR/USD also sold off amid an escalation in geopolitical tensions in the Middle East, which increased safe-haven flows to the US Dollar. On Tuesday evening, Iran fired about 200 missiles, including some ballistic, at Israel’s capital Tel Aviv in a revenge attack after Israel killed Hasan Nasrallah, the head of the Iran-backed militia group Hezbollah.

Technical Analysis: EUR/USD possibly beginning descent within multi-year range

EUR/USD has been contained within a broad multi-year range that has a ceiling at roughly 1.1200 and a floor at around 1.0500. The pair is currently testing the top of the range but after multiple touches appears to be pulling back down.

EUR/USD Daily Chart

EUR/USD is probably in a sideways trend on all its key timeframes (short, medium, and long-term) and since it is a principle of technical analysis that “the trend is your friend” the odds favor a continuation of this sideways trend, which in this case means move back down towards the range lows.

Prices now appear to be beginning a down leg. They have reached a key support level in the form of the red 50-day Simple Moving Average (SMA) at 1.1041, which is likely to slow the sell-off at least temporarily.

For confirmation of the start of a proper leg down prices should break through the 50-day SMA, the trendline for the last up leg, and the September 11 swing low at 1.1002. A close below 1.1000, therefore, would provide strong bearish confirmation. The downside target for such a move would be 1.0875, the 200-day SMA, followed by 1.0777 (August 1 low) and then 1.0600.

Momentum as measured by the Moving Average Convergence Divergence (MACD) is relatively bearish over the last few days and the blue MACD line has crossed below the red signal line, suggesting more evidence the pair could be vulnerable to further weakness.

Euro FAQs

What is the Euro?

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%).

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.

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