The Euro (EUR) manages to improve its performance against the US Dollar (USD), motivating EUR/USD to surpass the key barrier at 1.0700 the figure on Tuesday.
The Greenback remains under further selling pressure and puts the key 105.00 support to the test when tracked by the USD Index (DXY), in the context of a marginal uptick in US yields across the curve and prudence prior to the Federal Reserve (Fed) meeting on Wednesday.
In terms of monetary policy, investors are still evaluating the dovish rate hike implemented by the European Central Bank (ECB) last week. Furthermore, they maintain their anticipation of potential interest rate cuts by the Fed taking place at some point in the second quarter of 2024.
In the Euro’s data space, the Current Account surplus in the eurozone shrank to a seasonally adjusted €20.9 billion in July, while final inflation figures for August saw the headline CPI rise 5.2% from a year earlier and 5.3% YoY when it comes to the Core CPI (excluding energy and food costs).
In the US, Bulding Permits expanded at a monthly 6.9% in August (1.543M units) and Housing Starts contracted 11.3% MoM (1.283M units).
EUR/USD appears to be gaining strength and moving towards the 1.0700 level, but it is important for the pair to quickly surpass the 200-day SMA at 1.0828 in order to alleviate some of the recent bearish sentiment.
In the event that the EUR/USD breaks under its September 14 low of 1.0631, there is a possibility that it may revisit the March 15 low of 1.0516 before reaching the 2023 bottom of 1.0481 from January 6.
On the upside, the focus is on the critical 200-day Simple Moving Average (SMA) at 1.0828. If the pair manages to break above this level, it could potentially lead to a bullish momentum. This could result in a test of the provisional 55-day SMA at 1.0919, seconded by the August 30 high of 1.0945. If this scenario unfolds, it may open the way for a rally towards the psychological level of 1.1000 and the August 10 top of 1.1064. Further upside movement could see the pair aiming for the July 27 peak at 1.1149, ahead of the 2023 high at 1.1275 seen on July 18.
However, as long as the EUR/USD remains below the 200-day SMA, there is a possibility that the pair may continue to experience downward pressure.
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.