Euro climbs to daily highs around 1.0930 as US Dollar deflates
- Euro extends the recovery to the 1.0930 region vs. the US Dollar.
- Stocks in Europe closed in a mixed tone at the beginnng of the week.
- EUR/USD gathers impulse and flirts with 1.0930 on Monday.
- Final Manufacturing PMIs in the euro area remained depressed in June.
- US ISM Manufacturing PMI surprises to the downside in June.
At the start of the new trading week, the Euro (EUR) manages to bounce off earlier lows and encourages EUR/USD to retake the 1.0900 yardstick and above as markets in the old continent draw to a close on Monday.
Meanwhile, the US Dollar (USD) gives away part of the earlier move higher and returns to the sub-103.00 region when tracked by the USD Index (DXY), all against the backdrop of declining US yields across the curve, the improvement in the appetite for the risk-linked galaxy and ahead of the Independence Day holiday on Tuesday.
In the meantime, the potential future actions of the Federal Reserve and the European Central Bank (ECB) in normalizing their monetary policies remain a topic of ongoing debate amidst increasing speculation about an economic slowdown on both sides of the Atlantic. Currently, bets remain firm that there will be a 25 basis point rate increase by both central banks at their meetings in July.
Around the ECB, Board member Joachim Nagel said earlier in the session that there is still a way to go with policy tightening and the inflation outlook is predominated by upside risks. He reported that monetary policy signals are clearly pointing in the direction of further tightening.
Looking at the latest CFTC Positioning Report, net longs in EUR remained steady and reached a 2-week high of around 145K contracts in the week ending June 27, despite the spot reaching new monthly highs above 1.1000, which ultimately fizzled out due to the recovery in the risk-off trade and buying interest in the USD.
In terms of economic data, the final Manufacturing PMI figures for the euro area and Germany in June were 43.4 and 40.6, respectively.
Meanwhile, in the US, the final S&P Global Manufacturing PMI came in at 46.3 in June, Construction Spending expanded at a monthly 0.9% in May and the ISM Manufacturing PMI receded to 46.0 in June, coming in short of estimates.
Daily digest market movers: Euro could enter some consolidation near term
- The EUR regains 1.0900 and above vs. the USD.
- US markets face a shortened trading week due to Independence Day.
- Chinese Caixin Manufacturing PMI failed to surprised markets.
- ECB's Nagel reiterates that inflation risks are tilted to the upside.
- The probability of a Fed rate hike in July is near 88%.
- A softer-than-expected US ISM Manufacturing PMI weighs on the USD.
Technical Analysis: Euro faces the next up-barrier at 1.1012
EUR/USD rebounds from earlier lows and attempts to strengthen the move above the 1.0900 yardstick. That said, the next hurdle is then expected at the June peak of 1.1012 (June 22) prior to the 2023 high of 1.1095 (April 26), which is closely followed by the round level of 1.1100. North from here emerges the weekly top of 1.1184 (March 31, 2022), which is supported by the 200-week SMA at 1.1181, just before another round level at 1.1200.
On the flip side, the loss of the weekly low at 1.0835 (June 30) could open the door to a test of the interim 100-day SMA at 1.0819. The breakdown of the latter should meet the next contention area not before the May low of 1.0635 (May 31) ahead of the March low of 1.0516 (March 15) and the 2023 low of 1.0481 (January 6).
The constructive view of EUR/USD appears unchanged as long as the pair trades above the crucial 200-day SMA, today at 1.0595.
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.
