EUR/USD reverses intraday gains and drops to the crucial support of 1.0700 in Tuesday’s early New York session. The Euro fails to hold gains driven by strong Eurozone data against the US Dollar after the United States Bureau of Labor Statistics (BLS) reported a strong growth in the Q1 Employment Cost Index.
The economic data, a leading indicator of wage growth, grew at a robust pace of 1.2% from the estimates of 1.0% and the former reading of 0.9%. This has deepened fears of US inflation remaining stubbornly higher, as strong wage growth leads to robust household spending, which eventually fuels price pressures.
On the Eurozone front, preliminary inflation data for April and Gross Domestic Product (GDP) data for the first quarter have beat the consensus. Annually, the Harmonized Index of Consumer Prices (HICP) rose steadily and met estimates while core HCPI, that excludes food and energy prices, softened on a slower pace.
The Eurozone economy expanded at a stronger rate of 0.3% in the first quarter even though the European Central Bank (ECB) is maintaining its Main Refinancing Operations Rate at historic highs of 4.5%.
The Euro’s failure to hold gains after the release of the key economic indicators suggests that investors’ confidence about the ECB pivoting to interest rate cuts from June is intact. Speculation that the ECB will reduce interest rates starting in June remains unabated as a majority of ECB policymakers have also backed a rate-cut move. A few see the rate-cut campaign extending to following meetings this year.
EUR/USD struggles for a firm footing above the round-level support of 1.0700. The major currency pair struggles to break above the 20-day Exponential Moving Average (EMA), which trades around 1.0725.
The panoramic view of the EUR/USD pair indicates a sharp volatility contraction due to a Symmetrical Triangle formation on a daily timeframe. The upward-sloping border of the triangle pattern is plotted from October 3 low at 1.0448 and the downward-sloping border is placed from December 28 high around 1.1140.
The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, suggesting indecisiveness among market participants.
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.