Euro keeps hovering around around 1.0800, Lagarde fails to surprise markets
- The Euro meets initial resistance near 1.0810 vs. the US Dollar.
- Stocks in Europe trade mostly in the positive ground on Monday.
- The USD Index (DXY) remains offered, albeit supported near 104.00.
- German yields advance modestly at the beginning of the week.
- US markets will be closed on Monday due to Labor Day holiday.
- Germany’s trade surplus shrank to €15.9B in July.
- Investors' morale worsens in September, according to the Sentix index.
- ECB’s President Christine Lagarde reiterated the inflation remains too high.
The Euro (EUR) has regained some upward momentum against the US Dollar (USD), which has allowed EUR/USD to reestablish itself above the significant 1.0800 level as the week began.
Conversely, the Greenback is facing some downward pressure, retreating to the 104.00 range as indicated by the USD Index (DXY). This decline comes as investors continue to analyze the mixed results from the US jobs report released on Friday, which showed an increase of +187K jobs.
Meanwhile, confidence in the Federal Reserve's decision to pause its interest rate hikes for the remainder of the year remains strong. There is also emerging speculation that interest rate cuts may not occur until March 2024. On the other hand, the European Central Bank (ECB) is grappling with considerable uncertainty regarding potential rate decisions beyond the summer, with market discussions centered on the possibility of stagflation.
From the speculative community, net longs in the single currency shrank to levels last seen in early July during the week ended on August 29, according to the CFTC positioning report.
US markets will be closed on Monday due to the Labor Day holiday. The European calendar saw the German trade surplus fall to €15.9 billion in July, while the Investor Confidence gauged by the Sentix index worsened to -21.5 for the current month.
Daily digest market movers: Euro clings to gains around 1.0800
- The EUR manages to regain part of the ground lost against the USD.
- Trading conditions are expected to remain thin due to the US holiday.
- ECB Lagarde made no comments regarding the September meeting.
- Lower inflation, cooling labour market support the Fed’s pause on rates.
- Market participants start to price in rate cuts by the Fed in Q2 2024.
- The ECB appears divided regarding an interest rate hike later in the month.
Technical Analysis: Euro risks a deeper drop below 1.0765
EUR/USD picks up some pace and manages to retest the 1.0800 region, just ahead of the key 200-day SMA (1.0817).
Further recovery in EUR/USD is expected to target the critical 200-day SMA at 1.0817. North from here, bulls should meet last Wednesday's top of 1.0945 ahead of the interim 55-day SMA at 1.0961, prior to the psychological 1.1000 barrier and the August 10 monthly 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.
The resumption of the downward bias could motivate the pair to initially revisit the August 25 low of 1.0765. The breach of this level exposes the May 31 low of 1.0635, prior to the March 15 low of 1.0516 and the 2023 low at 1.0481 seen on January 6.
Furthermore, sustained losses are likely in EUR/USD once the 200-day SMA is breached in a convincing fashion.
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.
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.
