- Euro kicks off the new trading week on the back foot vs. the US Dollar.
- Stocks in Europe open Monday’s session in the red.
- EUR/USD recedes to the 1.0970 region on Fed, risk-off mood.
- The USD Index (DXY) regains the 102.00 barrier and above.
- Industrial Production in Germany contracted 1.5% MoM in June.
On the flip side of the coin, the Greenback manages to regain traction after two consecutive daily pullbacks, regaining at the same time the area beyond 102.00 the figure, as investors continue to digest Friday’s release of the Nonfarm Payrolls figures (+187K).
On the latter, it is worth recalling that despite the US economy creating fewer jobs than initially projected, wage growth remained steady and the jobless rate improved to 3.5%, indicating that the resilience of the labour market appears almost intact.
Other than the prevailing risk-off sentiment, the renewed bid bias in the US Dollar appears propped up by comments by the FOMC’s Michelle Bowman, who advocated for further rate hikes (at the next meeting?) in case disinflationary pressures stall.
The latter comes in contrast to steady speculation that the Fed’s rate hike in July might have been its last for the foreseeable future. Additionally, the possibility of the European Central Bank (ECB) implementing further tightening measures beyond the summer seems to be losing momentum.
In the euro docket, Industrial Production in Germany contracted 1.5% MoM in June and 1.8% over the last 12 months. In addition, Investor Confidence tracked by the Sentix index improved to -18.9 for the month of August.
In the US, Consumer Credit Change will be the sole release along with short-term bill auctions.
Daily digest market movers: Euro starts the week offered and below 1.1000
- The EUR drops to the 1.0970 region vs. the USD on Monday.
- The USD Index (DXY) retakes the 102.00 hurdle and beyond.
- Risk aversion looks firm at the beginning of the week.
- Fed’s Bowman did not rule out extra tightening in the near term.
- CME Group’s FedWatch Tool sees no rate hikes by the Fed in H2 2023.
- Speculation that the Fed might have ended its hiking cycle remains steady.
- Investors’ focus is expected to shift to US inflation figures (August 11).
Technical Analysis: Euro remains offered below 1.1149
EUR/USD comes under renewed downside pressure and breaches the key psychological support at 1.1000.
The loss of the 1.0920 region, where the provisional 55-day and 100-day SMAs converge, leaves EUR/USD vulnerable to a probable drop to the July low of 1.0833 (July 6) ahead of the key 200-day SMA at 1.0748 and the May low of 1.0635 (May 31). South from here emerges the March low of 1.0516 (March 15) before the 2023 low of 1.0481 (January 6).
On the other hand, occasional bullish attempts could motivate the pair to initially dispute the weekly top at 1.1149 (July 27). Above this level, the downside pressure could mitigate somewhat and could encourage the pair to test the 2023 high at 1.1275 (July 18). Once this level is cleared, there are no resistance levels of significance until the 2022 peak of 1.1495 (February 10), which is closely followed by the round level of 1.1500.
Furthermore, the constructive view of EUR/USD appears unchanged as long as the pair trades above the key 200-day SMA.
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.