Euro consolidates above 1.1350, seems vulnerable near late July lows amid bullish USD
- EUR/USD struggles to gain any meaningful traction as the USD retains its near-term bullish bias.
- Fed hike bets, surging US bond yields and geopolitical uncertainties continue to support the buck.
- ECB's Lagarde backs measured response to rein in inflation, keeping Euro bulls on the back foot.
The EUR/USD pair is seen consolidating around the 1.1365-1.1370 region during the Asian session on Tuesday and trading near its lowest level since July 28, touched the previous day. Traders now seem hesitant and opt to wait for further developments surrounding the Middle East crisis before placing fresh directional bets.
US President Donald Trump rejected an Iranian proposal to end fighting and reopen the Strait of Hormuz immediately on meeting their terms. However, media reports suggested that Trump was ready to ease sanctions on Iran and release its frozen assets in exchange for concrete progress on the country's nuclear program. Nevertheless, the broader fundamental backdrop seems tilted in favor of US Dollar (USD) bulls and suggests that the path of least resistance for the EUR/USD pair is to the downside.
The US Federal Reserve (Fed) projected another rate increase by the end of this year after delivering the widely expected 25 basis points (bps) hike for the first time in over three years earlier this month. Moreover, energy-driven inflationary concerns underpin prospects for additional Fed tightening, which continues to push US bond yields to multi-year highs. This, in turn, assists the USD to stand firm near a two-month high, touched last Thursday, and validates the negative outlook for the EUR/USD pair.
Meanwhile, the European Central Bank (ECB) President Christine Lagarde told a European Parliament committee on Monday that a measured policy response remains appropriate as there's no evidence at this stage of energy prices feeding into higher wages. Lagarde's attempt to push back on market bets for a more aggressive rate-hiking cycle should keep Euro bulls on the back foot, warranting caution before confirming that the EUR/USD pair has bottomed out and positioning for any meaningful recovery.
EUR/USD daily chart
Technical Analysis
The EUR/USD pair’s near-term tone remains bearish, though a convincing break below the 1.1350 horizontal support is needed to back the case for further losses. Spot prices might then drop to the year-to-date low, near 1.1325 touched in June, en route to 1.1300.
On the top side, any attempted recovery is more likely to attract fresh sellers near the 1.1460 supply zone, which, if cleared, could lift the EUR/USD pair beyond the 1.1500 psychological mark, though it is likely to remain capped near the 200-day SMA at 1.1557.
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
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
