Euro picks up above 1.1400 amid lower Oil prices and a softer US Dollar

EUR/USD returns above 1.1400 after bouncing up from 13-month lows at 1.1325.
A sharp decline in Oil prices has improved market sentiment and is providing some support to the Euro.
US Dollar dips are likely to remain shallow, amid strong US data and rising Fed tightening bets.

Guillermo Alcala FXStreet

The Euro (EUR) pares previous weekly losses against the US Dollar (USD) on Friday, favoured by a sharp decline in oil prices and a somewhat softer US Dollar. The pair explores session highs above 1.1400 at the time of writing, up from 13-month lows at 1.1325, but maintains its broader bearish trend intact.

The common currency is drawing support from cheaper Oil as the price of a barrel of Brent crude fell below $73.00, returning to pre-war levels. Brent prices are 9% down on the week and have accumulated a more than 30% decline over the last six weeks, relieving pressure on oil-importing Eurozone economies.

Hopes of further ECB tightening ease

Lower crude prices, on the other hand, are easing pressure on the European Central Bank (ECB) to keep tightening interest rates, which might limit the Euro’s recovery. ECB council members have shown mixed views in their most recent public appearances, with Isabel Schnabel reiterating the need to tighten monetary policy further to ease inflation, while Emmanuel Mouling said on Thursday that recent changes are steering the economy toward a “more positive scenario.”

Beyond that, a survey by the ECB released on Friday reveals that Eurozone consumers foresee price pressures easing to 3.5% over the next 12 months, down from the 4.0% level estimated in the previous month. Regarding the economic outlook, Europeans see GDP contracting in the medium term, which might prompt the central bank to adopt a more cautious stance on monetary tightening.

The Euro has also been favoured by a mild US Dollar pullback on Friday, although this trend is unlikely to extend much further. The combination of solid US macroeconomic data and rising bets of Federal Reserve rate hikes is likely to keep US Dollar dips limited for some time.

Data released on Thursday revealed that US inflation remains well above target, despite the recent decline in oil prices. Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s inflation gauge of choice, accelerated to a 4.1% year-on-year growth in May, its highest level in three years, endorsing the central bank’s hawkish bias. Later on the day, the Michigan Consumer Sentiment index will be observed to confirm those views.

Economic Indicator

Michigan Consumer Sentiment Index

The Michigan Consumer Sentiment Index, released on a monthly basis by the University of Michigan, is a survey gauging sentiment among consumers in the United States. The questions cover three broad areas: personal finances, business conditions and buying conditions. The data shows a picture of whether or not consumers are willing to spend money, a key factor as consumer spending is a major driver of the US economy. The University of Michigan survey has proven to be an accurate indicator of the future course of the US economy. The survey publishes a preliminary, mid-month reading and a final print at the end of the month. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Why it matters to traders?

Consumer exuberance can translate into greater spending and faster economic growth, implying a stronger labor market and a potential pick-up in inflation, helping turn the Fed hawkish. This survey’s popularity among analysts (mentioned more frequently than CB Consumer Confidence) is justified because the data here includes interviews conducted up to a day or two before the official release, making it a timely measure of consumer mood, but foremost because it gauges consumer attitudes on financial and income situations. Actual figures beating consensus tend to be USD bullish.

Economic Indicator

UoM 1-year Consumer Inflation Expectations

The University of Michigan's Inflation Expectations gauge captures how much consumers anticipate prices will change over the coming 12 months. It comes out in two rounds—a preliminary release that tends to pack a bigger punch, followed by a revised update two weeks later.

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