Euro trades lower after the release of US macro data
- Euro vs US Dollar sees loses after the release of US macro data including Q1 GDP.
- US recession and banking crisis fears still live amidst reports of First Republic Bank teetering again.
- The trend remains bullish according to technical analysis with the 200-day SMA at circa 1.1190 as the next target.
The Euro (EUR) trades lower against the US Dollar (USD) after the release of several major US macroeconomic data releases during the early US session, on Thursday. The pair has stabilized above 1.1000, however, after a bout of recent volatility, caused by renewed recession fears and banking crisis deja vu in the US. From a technical standpoint, the overall trend is up and the probabilities favor long holders.
EUR/USD market movers
- GDP in the US in the first quarter showed a lower-than-expected gain in the annualised estimate of 1.1% vs 2.0% forecast according to the US Bureau of Economic Analysis (BEA).
- The effect on the US Dollar was positive, however, suggesting traders may have been more influenced by a higher-than-expected GDP Price Index for the same period, which came out at 4.0% versus 3.8% expected.
- US Personal Consumption Expenditure Prices showed an inflationary rise of 4.2% versus the 0.5% expected, and Personal Consumption Expenditure rose 4.9% versus 4.8% forecast. These may also have aided the US Dollar.
- Initial Jobless Claims(Apr 21) came out lower-than-expected at 230K versus the 248K forecast.
- First Republic Bank is mulling over selling half its loan book to plug a $100B deposit flight gap, renewing banking-crisis fears.
- Impact on the US Dollar is debatable. Some analysts see upside for the USD on increased safe-haven demand, whilst others focus on how it would dissuade the Fed from hiking – a Dollar-negative.
- US Consumer Confidence figures for April eclipsed higher-than-expected New Home Sales and were seen as warning of an impending US recession.
- JP Morgan’s CIO, Bob Michele, sees deposit flight in the US as more systematically linked to lower-income earners burning through savings to meet the rising cost of living, further raising banking/recession concerns.
- The Euro has been supported by overall hawkish comments from ECB officials such as Pierre Wunsch, president of Belgium’s Banque Nationale, who said, “We are waiting for wage growth and core inflation to go down... before we can arrive at the point where we can pause (hiking rates).”
- ECB’s chief economist Philip Lane went on record as saying interest rates will rise at the May 4 meeting but whether beyond that depends on the data.
- Previously, Lane had said a lot is riding on the state of Eurozone banks, as assessed by the ECB’s Bank Lending Survey out on May 2, as well as April flash HICP inflation data released on the same day.
- Strong first quarter earnings by European banks due to higher interest margins, however, suggest the bank survey may paint a favorable picture.
- ECB President Christine Lagarde recently said there is still “some way to go” before Frankfurt is done with hiking interest rates.
- The US Dollar is at a disadvantage since Federal Reserve (Fed) officials are in the two-week blackout period before the May 4 meeting, during which time they are not allowed to comment.
- Before the blackout, St. Louis Fed’s Bullard was hawkish, saying he expects more rate hikes due to persistent inflation and overblown recession fears.
- Eurozone Consumer Confidence data for April comes out in line with expectations at -17.5, barely impacting the pair at all.
EUR/USD technical analysis: New triangle potentially forming
EUR/USD reached a new 2023 high of 1.1095 and has rolled over to trade in the mid 1.10s, at the time of writing. The broader medium-term uptrend, however, remains intact – and will continue to – as long as the 1.0830 lows hold. Overall the odds favor a continuation of the dominant Euro bullish trend.
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EUR/USD: 4-hour Chart
On the 4-hour chart, EUR/USD looks like it may be forming a triangle pattern, with Wednesday’s highs representing a false breakout. If so, the triangle looks like it may have formed four distinct waves, labeled A-D on the chart above, and the current downmove could be wave E. Since triangles are usually composed of five waves it may be close to completing.
Triangles can breakout in either direction but, given the dominant trend is bullish, the odds partially favor a breakout higher. As such, a decisive break above the 1.1095 year-to-date highs would confirm such a bullish breakout from the triangle, and a continuation of the Euro’s uptrend to the next key resistance level at around 1.1190, where the 200-week Simple Moving Average (SMA) is located. If the triangle fulfills its full price potential, however, the Euro-US Dollar could even reach 1.1229.
For the sake of clarity, a ‘decisive break’ might be a ‘breakout candle’ – a long green bullish daily candle that extends above the 1.1075 highs and closes near its high – or three smaller bullish green candles in a row that break above the highs.
Alternatively, a break and daily close below the key 1.0909 lows would signify a bearish breakout from the triangle, with a target at 1.0805, which in itself could suggest a possible reversal of the dominant trend.
European Central Bank FAQs
What is the ECB and how does it influence 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 for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
What is Quantitative Easing (QE) and how does it affect the Euro?
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
What is Quantitative tightening (QT) and how does it affect the Euro?
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Author
Joaquin Monfort
FXStreet
Joaquin Monfort is a financial writer and analyst with over 10 years experience writing about financial markets and alt data. He holds a degree in Anthropology from London University and a Diploma in Technical analysis.
