Euro clings to daily gains around the 1.0800 zone
- The Euro advances modestly above 1.0800 against the US Dollar.
- Stocks in Europe on their way to a positive close on Monday.
- The USD Index (DXY) trades mildly offered near 104.00.
- US yields correct lower vs. a marginal uptick in German bund yields.
- The Dallas Fed Manufacturing Index is the only datapoint on the US docket.
The Euro (EUR) had a promising start to the week as it gained some upward momentum against the US Dollar (USD) on Monday. This pushed EUR/USD above the key 1.0800 yardstick, which also aligns with the significant 200-day SMA.
On the other hand, the Greenback experienced a partial retracement of its recent two-day advance and revisited the 104.00 area, as indicated by the USD Index (DXY). This occurred amidst a modest recovery in risk-associated assets and a minor correction in US yields across different maturities.
Meanwhile, investors appear to have already absorbed Chair Jerome Powell's speech at the Jackson Hole Symposium on Friday. In his speech, Powell maintained flexibility in policy options and reiterated that the possibility of further rate hikes should not be dismissed.
On the latter, and according to CME Group, the probability of a 25 bps rate hike at the Fed's November 1 meeting approaches 52%.
Concerning monetary policy, there is a revitalized discussion surrounding the commitment of the Federal Reserve to uphold a stricter stance for an extended duration of high interest rates. This increased focus arises from the impressive resilience of the US economy, despite the slight easing in the job market and decreased inflation statistics witnessed in recent months.
Simultaneously, inside the European Central Bank (ECB), conflicts among its council members have surfaced around the potential extension of rigorous measures beyond the summer period. These differences of opinion are causing a renewed sense of vulnerability, which is negatively impacting the Euro.
On the US calendar, the only scheduled release on Monday will be the Dallas Fed Manufacturing Index.
Daily digest market movers: Euro remains under pressure ahead of key week
- The EUR trespasses the 1.0800 yardstick against the USD.
- German 10-year bund yields trim earlier gains.
- ECB's J. Nagel said the decision in September hinges on data.
- ECB's M. Holzmann favoured a rate hike at the September meeting.
- US yields face some downward bias at the beginning of the week.
- The markets’ focus shifts to the US labour market.
- Fed’s tighter-for-longer narrative keeps running in the background.
- Powell’s speech favoured maintaining the tight stance for now.
- Investors see the Fed hiking rates by 25 bps in November.
Technical Analysis: Euro faces an initial support at 1.0765
The selling pressure around EUR/USD appears to have somewhat eased at the beginning of the new trading week, allowing the spot price some breathing room around the 1.0800 region.
Further decline could motivate the EUR/USD pair to revisit Friday's low of 1.0765, ahead of the May 31 low of 1.0635 and the March 15 low of 1.0516. The loss of this level could prompt a test of the 2023 low at 1.0481 seen on January 6 to re-emerge.
Occasional bouts of strength, in the meantime, should meet provisional resistance at the 55-day SMA at 1.0965 prior to the psychological 1.1000 barrier and the August 10 high at 1.1064. Once the latter is cleared, spot could challenge the July 27 top 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 recorded on July 18. Further up comes the 2022 high at 1.1495, which is closely followed by the round level of 1.1500.
Furthermore, sustained losses are likely in the EUR/USD pair once the 200-day SMA (1.0805) 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.
