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EUR/USD steadies around 1.0850 as markets eye Eurozone, US inflation data

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FXStreet in Market News 12 392042
May 27, 2024 16:26

content provided with permission by FXStreet

  • EUR/USD trades sideways around 1.0850 on a thinly traded day.
  • The Euro strengthens as investors remain uncertain over ECB reducing rates in July too.
  • Investors expect that the Fed will start lowering borrowing rates in the last quarter of this year.

EUR/USD is stuck in a tight range around 1.0850 in Monday’s European session, in a calm start to the week ahead of the release of inflation data on both sides of the Atlantic on Friday. The major currency pair exhibits strength as European Central Bank (ECB) policymakers avoid to commit about extending the rate-cut cycle beyond the June meeting. 

ECB policymakers do not want to promise more rate cuts as they seem to be concerned that aggressive policy easing could revamp price pressures again. 

In this context, traders have dialled back expectations of three rate cuts this year and are seeing only two due to recent economic indicators signalling persisting price pressures, such as the Negotiated Wage Rates for the first quarter and the preliminary HCOB Composite Purchasing Managers Index (PMI) data for May.

Higher wage growth deepens households’ pockets, which leads to a significant rise in consumer spending that fuels inflationary pressures. However, ECB board member and Bundesbank President Joachim Nagel downplayed the effect of higher wage growth, stating that it is a lagging indicator and the long-term trend is expected to remain soft.

On the economic front, German IFO data on Business Climate, Current Assessment and Expectations for May has been released. The overall data missed estimates, however, the Euro remains unchanged. 

German IFO Business Climate Index dipped slightly to 89.3 from 89.4 in April. Investors forecasted a sharp rise to 90.3.

The Current Economic Assessment Index declined to 88.3 from 88.9 in April, missing the consensus of 89.9.

The IFO Expectations Index, which indicates firms’ projections for the next six months at 90.4, fell short of the market consensus of 90.5 but remains higher than the former reading of 89.7.

Daily digest market movers: EUR/USD remains sideways as US markets close

  • EUR/USD trades in a tight range around 1.0850 as trading volume remains thin on account of a holiday in United States markets due to Memorial Day. This week, volatility is expected to be high as the Eurostat is set to release the preliminary inflation data for May and the United States Bureau of Economic Analysis (BEA) will report the core Personal Consumption Expenditure Price Index (PCE) data for April. Both reports will be published on Friday.
  • Investors will keenly focus on the Eurozone inflation data as ECB policymakers are widely expected to announce a rate cut in their monetary policy meeting in June, barring any surprise. ECB officials remain comfortable with market speculation for a return to policy normalization in June, but many are reluctant to commit to any subsequent move and want to remain data-dependent.
  • The expectations for the Eurozone preliminary inflation report suggest that the annual core reading – which strips off volatile items like food, energy, tobacco and alcohol – will remain steady at 2.7%. The headline figure is estimated to have accelerated to 2.5% from 2.4% in April. The inflation data isn’t likely to significantly impact the rate-cut decision for June.
  • Meanwhile, the US Dollar steadies in the early European session after a steep sell-off on Friday. The US Dollar Index (DXY) fell to 104.65 despite investors losing confidence in the Federal Reserve (Fed) beginning to lower interest rates in the September meeting. 
  • The CME FedWatch tool shows that traders see a little over 50% chance that the central bank will keep interest rates unchanged in September, up from 38% last week. The odds leaning towards keeping rates on hold have been driven by a surprisingly strong preliminary US PMI report for May.
  • This week, the core PCE inflation data will influence market speculation for Fed rate cuts in September. The Consumer Price Index (CPI) data for April, which was published earlier this month, showed price pressures cooled after a hot first quarter. This deceleration suggests that the core PCE, the Fed’s preferred inflation measure, will also have softened from its prior reading of 2.7% on a year-on-year basis.

Technical Analysis: EUR/USD holds the triangle breakout

EUR/USD consolidates around 1.0850 ahead of crucial inflation data for both the Eurozone and the US. The major currency pair indicates broader strength as it strongly holds the breakout from the Symmetrical Triangle chart pattern formed on a daily time frame. 

The near-term outlook of the shared currency pair remains firm as it is trading above all short-to-long-term Exponential Moving Averages (EMAs).

The 14-period Relative Strength Index (RSI) has fallen into the 40.00-60.00 range, suggesting that the upside momentum has faded for now.

In case of further upside, the major currency pair is expected to recapture a two-month high at around 1.0900. A decisive break above this level would drive the asset towards the March 21 high at around 1.0950 and the psychological resistance of 1.1000. However, a downside move below the 200-day EMA at 1.0800 could push the pair further down. 

Euro FAQs

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%).

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.

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.

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.

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.