Euro fades the earlier spike above 1.0900, Dollar trims losses
- Euro gives away part of its earlier gains against the US Dollar.
- Stocks in Europe on their way to a positive close on Monday.
- EUR/USD appears so far supported near 1.0840.
- The USD Index (DXY) regains some balance and retests 103.40.
- Producer Prices in Germany surprised to the downside in July.
- Short-term Bills auctions will be the sole event across the pond on Monday.
On Monday, the Euro (EUR) experienced a partial recovery from its recent decline against the US Dollar (USD), resulting in EUR/USD surpassing the significant barrier at 1.0900 and reaching a two-day high. The uptick, however, seems to have run into a solid resistance near 1.0915 so far.
Simultaneously, the US Dollar saw a corrective pullback after reaching new highs in August, close to 103.70 on Friday. Despite an initial increase in US yields during European trading hours, the weakness in the Greenback caused the USD Index (DXY) to retreat to the 103.20 region.
In terms of monetary policy, there has been renewed discussion surrounding the Federal Reserve's commitment to maintaining a tighter policy stance for an extended period. This discussion arises from the resilience demonstrated by the US economy, despite some easing in the labor market and lower inflation readings in recent months.
Internally, within the European Central Bank (ECB), disagreements among its Council members regarding the continuation of tightening measures after the summer period have contributed to renewed weakness in the Euro.
Looking ahead, market participants are expected to proceed cautiously in anticipation of the Jackson Hole Symposium and Chairman Jerome Powell's upcoming speech in the latter half of the week.
In other news, according to the latest report from the Commodity Futures Trading Commission (CFTC), speculative net long positions in the Euro (EUR) reached a two-week high in the week ending August 15.
Data-wise, Producer Prices in Germany contracted at a monthly 1.1% in July and 6.0% over the last twelve months. The period under scrutiny saw EUR/USD come under heavy pressure amidst the multi-week rally in the Greenback helped by stronger-than-expected results in the US docket.
Daily digest market movers: Euro's move above 1.0900 lacks follow through
- The EUR returns to the sub-1.0900 area against the USD.
- The PBoC reduced by 10 basis points the 1-Year Loan Prime Rate to 3.45%.
- Investors will closely follow the developments from the Jackson Hole event.
- US 10-year and 30-year yields resume the uptrend to multi-year highs.
- Fed’s tighter-for-longer narrative remains well in place.
- The Fed is likely to maintain rates at current levels until Q1 2024.
Technical Analysis: Euro does not rule out further losses near term
EUR/USD manages to stage a decent rebound, with the immediate target at the 1.0900 barrier at the beginning of a new trading week. Despite the current bounce, the pair is still seen under pressure.
In case of further losses, EUR/USD could retest the August 18 low of 1.0844 ahead of the July 6 low of 1.0833. The breakdown of the latter exposes the significant 200-day SMA at 1.0792 ahead of the May 31 low of 1.0635. Deeper down, there are additional support levels at the March 15 low of 1.0516 and the 2023 low at 1.0481 seen on January 6.
Occasional bullish attempts, in the meantime, are expected to meet initial hurdle at the August 10 high at 1.1064 prior to the 1.1149 from July 27. If the pair clears the latter, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 registered on July 18. Once this region is surpassed, significant resistance levels become less prominent until the 2022 high at 1.1495, which is closely followed by the round level of 1.1500.
Furthermore, the positive outlook for EUR/USD remains valid as long as it remains above the important 200-day SMA.
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.
