EUR/USD edges higher amid US data miss, ECB’s decision
- EUR/USD is buoyed by a weaker US Dollar following underwhelming US services sector performance.
- The Eurozone's strong services and composite PMI readings suggest a slow yet positive economic recovery despite ongoing risks.
- Market expectations shift, now forecasting close to 1% in Fed rate cuts by the end of 2024, as attention turns to an imminent ECB policy meeting.
During the North American session, the Euro extended its gains of more than 0.10% as the Greenback weakness in early Tuesday trading. After meandering at around the day’s lows of 1.0840, weaker than expected US data, the EUR/USD trades at around 1.0870.
Greenback dips on weak PMI figures, traders adjust Fed rate cuts expectations
The US economic calendar featured the release of the S&P Global Services PMI, followed by the Institute for Supply Management (ISM) PMI. The former rose to 52.3, below January 52.5, while the Composite PMI, which encompasses manufacturing and services activity, was 53.8, missing estimates and the previous reading of 54.2.
Lately, the ISM Services PMI stood at 52.6, down from 53.4 and below the consensus of 53, triggering a downward reaction on the US Dollar. The US Dollar Index (DXY), which tracks the performance of six currencies against the buck, dropped to an eight-day low of 103.58 on the release. Yet, it has paired some of its losses but remains negative at 103.69, down 0.13%.
Across the pond, the Eurozone (EU) HCOB Flash PMIs for Services and Composite were released. The Services Index rose 50.2, above expectations of 50.0, while the Composite improved to 49.2 from the 48.9 expected. Although the data suggests the EU’s economy is improving, downside risks remain. Even though the data was mixed, the EUR/USD failed to gain steam as traders await the European Central Bank (ECB) decision on Thursday.
Given the fundamental backdrop, the Federal Reserve’s (Fed) rate cut expectations continued to adjust. Data from the Chicago Board of Trade (CBOT) shows traders estimate 99 basis points (bps) of easing toward the end of 2024.
EUR/USD Price Analysis: Technical outlook
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.
Author
Christian Borjon Valencia
FXStreet
Christian Borjon began his career as a retail trader in 2010, mainly focused on technical analysis and strategies around it. He started as a swing trader, as he used to work in another industry unrelated to the financial markets.
