Euro remains under pressure and could retest the 1.0700 area
- The Euro's decline picks up extra pace against the US Dollar, with EUR/USD printing new three-month lows near 1.0715.
- Stocks in Europe trade in a mixed bias, while US markets return to their usual activity.
- The USD Index (DXY) shifts the attention to the 105.00 hurdle.
- The final Services PMIs painted a gloomy picture for the sector.
- The ECB's Consumer Expectation Survey sees inflation higher in three-years' time.
- Fed's C. Waller said the current data favours a soft landing.
The Euro (EUR) continues its descent against the US Dollar (USD), causing EUR/USD to reach fresh lows not seen in three months, hovering around 1.0715 on Tuesday. The renewed selling pressure surrounding spot seems to be driven by disappointing Caixin Services PMI data from China, indicating a slowdown in the country's services sector. Additionally, the domestic final readings from the Eurozone's own services sector did not provide any support for the single currency either.
The investors’ bias towards the safe-have universe lends support to the Greenback early in the European morning and lifts the USD Index (DXY) to new highs beyond 104.80 amidst the still unclear direction in US and German bond yields.
Meanwhile, the market remains confident regarding the Federal Reserve's (Fed) decision to halt its campaign of interest rate hikes for the remainder of the year. In addition, speculation has begun to emerge over the possibility that interest rate cuts may not materialize until March 2024.
On the other hand, the European Central Bank (ECB) finds itself navigating a climate of heightened uncertainty surrounding the potential course of interest rates beyond the summer months. Market discussions revolve around the concept of stagflation, further contributing to the prevailing sense of ambiguity.
In the US data space, Factory Orders and the IBD/TIPP Economic Optimism Index are due.
Daily digest market movers: Euro faces increasing headwinds as 1.0700 looms closer
- The EUR faces extra headwinds against the USD on Tuesday.
- Chinese Caixin Services/Composite PMIs weakened in August.
- The European Services sector PMIs slipped back into the contraction territory.
- Disinflation and cracks in the US labour market support the Fed’s impasse.
- Investors see the Fed potentially cutting rates in Q2 2024.
- The RBA left its benchmark interest rate unchanged at 4.10% as expected.
Technical Analysis: Euro's outlook continues to deteriorate
EUR/USD remains under pressure and the recent breach of the key 200-day Simple Moving Average (SMA) at 1.0819 seems to prop up the likelihood of extra losses in the short term.
If EUR/USD accelerates its losses, it could revisit the May 31 low of 1.0635, prior to the March 15 low of 1.0516. The loss of the latter could prompt a potential test of the 2023 low at 1.0481 from January 6.
On the upside, spot is expected to target the critical 200-day SMA at 1.0819. North from here, bulls should meet the the weekly top of 1.0945 seen on August 30 ahead of the interim 55-day SMA at 1.0958 and prior to the psychological 1.1000 barrier and the August top at 1.1064. Once the latter is cleared, spot could challenge July 27 peak at 1.1149. If the pair surpasses this region, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 seen on July 18. Further up comes the 2022 high at 1.1495, which is closely followed by the round level of 1.1500.
Still, sustained losses are likely in EUR/USD if the 200-day SMA is breached in a convincing fashion.
Interest rates FAQs
What are interest rates?
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
How do interest rates impact currencies?
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
How do interest rates influence the price of Gold?
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
What is the Fed Funds rate?
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Pablo Piovano
FXStreet
Born and bred in Argentina, Pablo has been carrying on with his passion for FX markets and trading since his first college years.
