Euro appreciates further as hopes of lower rates boost risk appetite
- The Euro keeps crawling higher on risk appetite and a weak US Dollar.
- A softer US economic growth outlook and easing inflation pressures are boosting hopes of Fed cuts.
- In the absence of key data, risk appetite might buoy the Euro before key Eurozone figures are released.
The Euro (EUR) is trading with a positive tone in Wednesday’s early US session following a long Christmas weekend. The pair is has reached the upper range of 1.1000 with investors celebrating the end of the global tightening cycle, which is expected to support economic growth and lessen the risks of a deep recession next year.
Data released in the US last week revealed that inflation is ebbing fast. The Personal Consumption Expenditures (PCE) Prices Index, the Fed´s favorite inflation gauge, declined to its lowest reading in nearly three years.
Beyond that, third quarter US Gross Domestic Product was revised down to a 4.9% growth from the same period last year, which was lower than previous estimations of 5.2%.
These figures confirm the soft landing rhetoric of lower growth and receding inflation that fuels prospects that the US central bank will start cutting rates in early 2024. This is boosting investors’ appetite for risk and weighing the US Dollar across the board.
Daily digest market movers: Hopes of Fed cuts are hammering the US Dollar
- The Euro remains steady at four-month highs as the Dollar keeps heading south on hopes of Fed cuts.
- Last week, the US PCE Price Index declined to 2.6% year-on-year from the downwardly revised 2.9% in October.
- The Core PCE Prices Index, which removes the impact of seasonal products like food and energy, showed a milder decline, to 3.2% from 3.4% in October. Still, it was lower than the 3.3% expected and well below the 5.6% peak seen in April 2022.
- The Core PCE Prices Index, which removes the impact of seasonal products like food and energy, is seen growing steadily at 0.2% and down to 3.3% from 3.5% in the year.
- These figures have cemented investors’ hopes of Fed rate cuts in early 2024. Futures markets are pricing more than 70% chances of a quarter-point rate cut in March and 150 bps cuts in 2024, according to the CME Group FedWatch Tool.
- US Treasury yields remain declining, with the benchmark 10 yield at 3.85%, more than 100 pips below the 5% peak reached in late October. This is adding negative pressure on the US Dollar.
- The calendar is light this week and the positive mood might support the Euro before the focus turns to key Eurozone macroeconomic releases.
Technical Analysis: Euro is testing 1.1065 with 1.1100 in sight
The Euro is trading higher for the third consecutive day on Wednesday. The pair has extended gains ahead of the US session opening, reaching levels right above 1.1065 for the first time since late July, as the US Dollar Index broke below the five-month lows at 101.40.
The technical picture remains positive, with price action well above the main SMAs and oscillators still below overbought levels, suggesting the possibility of further appreciation.
A confirmation above 1.1065, shifts the bulls' focus toward the 78.6% Fibonacci retracement of the third quarter's sell-off, in the vicinity of 1.1100 and the July 27 high, at 1.1145.
Supports are the mentioned 1.1000 and 1.0930.
Euro price this week
The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the strongest against the Japanese Yen.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.25% | -0.05% | -0.50% | -0.51% | 0.07% | -0.46% | -0.48% | |
| EUR | 0.35% | 0.23% | -0.12% | -0.19% | 0.36% | -0.10% | -0.13% | |
| GBP | 0.17% | -0.29% | -0.19% | -0.46% | 0.09% | -0.24% | -0.55% | |
| CAD | 0.52% | -0.06% | 0.41% | -0.25% | 0.59% | 0.22% | -0.11% | |
| AUD | 0.51% | 0.19% | 0.48% | 0.01% | 0.56% | 0.12% | -0.15% | |
| JPY | -0.07% | -0.30% | -0.30% | -0.29% | -0.55% | -0.33% | -0.69% | |
| NZD | 0.46% | 0.15% | 0.43% | -0.04% | -0.09% | 0.46% | 0.04% | |
| CHF | 0.66% | 0.11% | 0.27% | 0.13% | 0.21% | 0.69% | 0.05% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
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
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
