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EUR/USD flat lines around 1.1900; looks to US NFP report for fresh directional impetus

  • EUR/USD consolidates in a range as traders seem reluctant ahead of the NFP report.
  • The divergent Fed-ECB policy outlooks continue to act as a tailwind for spot prices.
  • The fundamental backdrop favors bulls and backs the case for a further move higher.

The EUR/USD pair is seen oscillating in a narrow trading band around the 1.1900 mark during the Asian session on Wednesday as traders opt to wait for the release of US monthly employment details before placing fresh directional bets.

Heading into the key data risk, the diverging interest rate paths between the US Federal Reserve (Fed) and the European Central Bank (ECB) continue to act as a tailwind for the EUR/USD pair. The disappointing release of US Retail Sales figures on Tuesday lifted investors' expectations that the US central bank will lower interest rates multiple times this year. In contrast, the ECB has been on hold since ending a year-long run of rate cuts in June last year, and a surprisingly resilient growth has taken all pressure off the policymakers to provide any further support.

Meanwhile, concerns about the Fed's independence resurfaced after US President Donald Trump said on Saturday that he might sue his newly selected Fed chair nominee, Kevin Warsh, if he didn’t lower interest rates. Furthermore, Fed Governor  Stephan Miran noted that 100% central bank independence is impossible. This, along with the underlying bullish sentiment, keeps the safe-haven Greenback depressed despite hawkish comments from a duo of Fed officials, saying that they would prefer to hold rates steady for now because of concerns about inflation.

The aforementioned fundamental backdrop favors the USD bears and suggests that the path of least resistance for the EUR/USD pair is to the upside. Hence, any corrective slide could be seen as a buying opportunity and is likely to remain limited. Traders, however, might refrain from placing aggressive directional bets ahead of the crucial US Nonfarm Payrolls (NFP) report, which, along with the US consumer inflation figures on Friday, will be looked for cues about the Fed's rate-cut path. This, in turn, will drive the USD and provide a fresh impetus to the EUR/USD pair.

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

Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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