Euro reverses course and turns negative below 1.1220
- Euro deflates from a new yearly high near 1.1280 against the US Dollar.
- Stocks in Europe head towards a mixed closing.
- EUR/USD meets resistance near 1.1280 so far on Tuesday.
- US Retail Sales surprised to the downside in June.
The Euro (EUR) loses some upside traction against the US Dollar (USD), and motivates EUR/USD to come all the way down from earlier tops near 1.1280, the highest level since February 2022. The so far daily downtick comes on the back of the rebound in the Greenback despite declining US and German yields across the curve.
On the broader picture, the possibility that the Federal Reserve (Fed) may be nearing the end of its tightening cycle continues to weigh on the US Dollar. Furthermore, this view has gained momentum recently with signs of cooling US consumer prices and downward trending producer prices.
The market has largely priced in 25-basis-point rate hikes from both the European Central Bank (ECB) and the Federal Reserve at their July events. However, there is still debate about their future moves as central banks work to normalize policy amid concerns of an economic slowdown in both Europe and the US.
Around the ECB, board member Klaas Knot suggested earlier in the session that core inflation has plateaued, but he did not rule out hikes beyond July.
Data-wise in the US economy, Retail Sales expanded below consensus 0.2% MoM in June, while Industrial Production contracted 0.5% MoM and 0.4% YoY also in the same month. Additionally, Business Inventories expanded 0.2% MoM in May and the NAHB Housing Market Index improved a tad to 56 in July.
Daily digest market movers: Euro faces renewed downside pressure
- The EUR's bullish move lacks follow through against the USD on Tuesday.
- ECB's Knot leaves the door open to additional rate raises beyond July.
- The USD Index appears bolstered by the 2023 lows near 99.50.
- Investors remain sceptical over further Fed tightening after the summer.
- US, German yields extend the corrective decline.
Technical Analysis: Euro could deflate to the 1.1000 region
Despite the ongoing knee-jerk, price action in EUR/USD suggests that further gains might be in store in the short-term horizon.
The pair printed a new 2023 high at 1.1275 on July 18. Once this level is cleared, there are no resistance levels of significance until the 2022 peak of 1.1495 recorded on February 10.
On the downside, the 1.1000 region emerges as a psychological support seconded by provisional support at the 55-day and 100-day Simple Moving Averages (SMAs) at 1.0890 and 1.0865, respectively, ahead of the July 6 low of 1.0833. A breakdown of this region should meet the next contention area at the key 200-day SMA at 1.0666 prior to the May 31 low of 1.0635. South from here emerges the March 15 low of 1.0516 before the 2023 low of 1.0481 on January 6.
Furthermore, the constructive view of EUR/USD appears unchanged as long as the pair trades above the key 200-day SMA.
However, the current pair’s overbought condition, as per the daily Relative Strength Index (RSI) above 75, carries the potential to trigger a technical correction in the short-term horizon.
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.
