Euro looks to US data for near term direction

The Euro keeps the bid bias unchanged against the US Dollar.
Stocks in Europe en route to close a positive session on Friday.
EUR/USD's daily upside looks limited near 1.0670.
The USD Index (DXY) treads water around 105.30.
The ECB seems to have entered an impasse regarding rate hikes.
US Industrial Production surprised to the upside in August.
Next on tap comes the Michigan Consumer Sentiment.

After experiencing multi-month lows on Thursday, the Euro (EUR) managed to gain some positive momentum against the US Dollar (USD) on Friday. This encouraged EUR/USD to climb back above the 1.0660 level by the end of the week.

The improved sentiment regarding this currency pair coincides with more robust results from the Chinese economic reports released early in the trading session. These positive reports contributed to the recovery of riskier assets.

Conversely, the US Dollar retreated from its recent multi-month highs around 105.40, as indicated by the USD Index (DXY). This retreat occurred in the context of further increases in US yields across various time frames.

The monetary policy landscape in the US remains broadly unchanged, with investors steadfast in their anticipation of potential interest rate cuts by the Federal Reserve (Fed) taking place at some point in the second quarter of 2024.

Shifting our attention to the European Central Bank (ECB), following the dovish rate hike on Thursday, market participants have begun to factor in an extended pause. This shift in sentiment is driven by the continuing deterioration of key economic indicators in Germany and the wider eurozone. Furthermore, inflation in the region continues to exceed the bank's target. The concerns of excessive tightening, along with mounting worries of stagflation, further support this outlook.

Back on the domestic calendar, final inflation figures in Italy showed the CPI rose 0.3% MoM in August and 5.4% over the last twelve months. In addition, the trade surplus in the broader eurozone narrowed to €6.5B during July.

Back to the ECB, President Christine Lagarde said at her speech at the ECOFIN meeting in Spain that the Council did not discuss rate cuts at the bank's event on Thursday. She also reiterated that interest rates need to be as restrictive as necessary to bring inflation down to the target in a timely fashion.

Across the Atlantic, August's Industrial Production rose 0.4% MoM and 0.2% YoY ahead of the preliminary gauge of the Michigan Consumer Sentiment survey for September.

Daily digest market movers: Euro looks bolstered around 1.0630

The EUR regains decent buying interest against the USD.
US and German yields accelerate their upside on Friday.
Markets see the ECB pausing its tightening campaign.
ECB's Madis Müller ruled out further rate hikes in the next months.
ECB's Martins Kazaks said Thursday's move was not a dovish hike (What was it, then?).
Chinese Retail Sales, Industrial Production surprised to the upside in August.
Investors keep assessing probable rate cuts by the Fed in Q2 2024.
ECB President Christine Lagarde's speech fell in line with her press conference.

Technical Analysis: Euro risks a probable decline to 1.0516

EUR/USD seems to have met initial contention around the 1.0630 region, or May lows, at the end of the week.

If EUR/USD manages to breach its September low at 1.0631 (September 14), it might enter a phase where it retests the March low at 1.0516 (March 15). Breaking through this level could trigger a potential review of the 2023 low at 1.0481 (January 6).

Conversely, the main focus is on reaching the crucial 200-day SMA at 1.0827 on the upside. Surpassing this level could initiate a bullish momentum, leading to a challenge of the interim 55-day SMA at 1.0926, followed by the weekly peak at 1.0945 (August 30). Exceeding the latter could open the door for an advance towards the psychological level of 1.1000 and the weekly top of 1.1064 (August 10). If the pair successfully clears this region, it may potentially aim for another weekly peak at 1.1149 (July 27), followed by the 2023 high at 1.1275 (July 18).

It's important to note that as long as the EUR/USD remains below the 200-day SMA, there is a possibility of a sustained decline in the pair.

Euro FAQs

What is the Euro?

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%).

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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