- EUR/USD is struggling with a solid footing of nearly 1.0800 as the USD index clings to get it near a three-week high of 104.40.
- Investors are awaiting US PCE inflation data on Friday for fresh interest rate guidance.
- ECB Villeroy supports further declines in key borrowing rates.
EUR/USD is striving to win the ground after a five-day streak at nearly 1.0800 during European trading hours on Wednesday. Still, as the US dollar (USD) holds recent profits, the outlook for the major currency pairs is uncertain, with the US dollar index (DXY) approaching a nearly three-week high at 104.40.
On Monday, President Trump said in the White House that all imminent taxes will not be imposed as tariffs could give “many countries” a break. It appears that various leaders of US trading partners have been able to negotiate a deal with Trump. While a Trump-led trade war is widely expected to lead to a slower global economy, wars with fewer countries will limit the scope of economic turmoil.
Still, US consumer confidence is declining as Trump's tariffs lead to a significant reduction in household purchasing power. On Tuesday, the conference committee reported a sharp decline in consumer trust data for March, a key emotional indicator that predicts consumer behavior. The sentiment data is now 92.9, significantly lower than the 100.1 seen in February.
Going forward, the main trigger for the US dollar is US Personal Consumption Expense Price Index (PCE) data for February, which will be released on Friday. Economists expect US core PCE inflation, the Federal Reserve's preferred inflation gauge, has grown at a faster pace of 2.7% year-on-year, compared to the 2.6% increase seen in January.
At last week's policy meeting, the Fed revised its forecast for this year's core Personal Consumption Expense Price Index (PCE) to 2.8%, from 2.5% forecast at its December meeting.
Daily Digest Market Mover: EUR/USD trades with caution in ECB Dovish bets
- EURO (EUR) outlook is uncertain amid growing expectations that the European Central Bank (ECB) will again cut interest rates, so EUR/USD will be traded with caution. The eurozone economy is expected to face serious negative side economic risks after the imposition of mutual tariffs by President Trump.
- Trump has signalled multiple times that he would impose tariffs on the eurozone by not buying enough American goods. Such a scenario is negative for the Old Continent. Historically, the economy moves to strengthen the domestic economy by lowering interest rates when external circumstances are not encouraged.
- The German economy has already shown support to strengthen the economy by circulating more euros. Last week, German leaders voted to extend borrowing restrictions to encourage national defense spending and the creation of an infrastructure fund worth 500 billion euros.
- ECB President Christine Lagarde also dials fears of sustained inflationary pressures, as there is a possibility of a US-Eurozone trade war. Lagarde said last week that the inflationary impact of the trade war was temporary as “decreasing economic activity will “attenuate in the medium term” as it “issues inflationary pressures.”
- On Tuesday, the ECB is a member of the council and bank governor of the Bank of France, François Villeroy des Garhau, said there was still room for “to lower interest rates further,” saying the 2.5% deposit facility fee “could drop to 2% by the end of the summer.”
Technical Analysis: Slips slips with EUR/USD below 1.0800
EUR/USD extended the correction to near the 20-day index moving average (EMA) from a five-month high of 1.0955, trading around 1.0760. However, the long-term outlook for the major currency pair remains bullish as it holds above the 200-day EMA, around 1.0667.
The 14-day relative strength index (RSI) cooled below 60.00, suggesting that bullish momentum has ended, but the upward bias is intact.
Looking down, the high of 1.0630 on December 6th serves as the pair's main support zone. Conversely, a psychological level of 1.1000 is an important barrier for the Eurobulls.
Euro FAQ
The euro is the currency of 19 European Union countries that belong to the eurozone. This is the world's second most frequently traded currency behind the US dollar. In 2022, it accounted for 31% of all forex trading, with an average daily turnover rate of over $2.2 trillion per day. EUR/USD is the most frequently traded currency pair in the world, with all transactions taking an estimated 30% off, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany is the reserve bank of the eurozone. The ECB sets interest rates and manages monetary policy. The ECB's main mission is to maintain price stability. This means controlling inflation or stimulating growth. Its main tool is raising or lowering interest rates. A relatively high interest rate, or higher interest rate expectation – usually benefits the euro and vice versa. The ECB Management Council makes monetary policy decisions at its eight meetings held annually. The decision will be made by six permanent members, including the head of the national bank in the eurozone and Christine Lagarde, the president of the ECB.
Eurozone inflation data is measured by a harmonious index of consumer prices (HICP) and is an important econometric for the euro. If inflation rises more than expected, the ECB requires that interest rates be raised and reverted back to control, especially if it exceeds the ECB's 2% target. A relatively high interest rate compared to its counterpart usually benefits the euro. This is because it makes the region more attractive as a place for global investors to park their money.
The data assesses the health of the economy and could affect the euro. Indicators such as GDP, Manufacturing and Services PMIS, Employment, and Consumer Sentiment Survey can all affect the direction of all currencies. A strong economy is good for the euro. It could not only attract more foreign investments, but it could also encourage the ECB to raise interest rates. This will directly strengthen the euro. Otherwise, the euro could fall if economic data is weak. Economic data for the four largest economies (Germany, France, Italy, Spain) (Germany, France, Italy, Spain) is particularly important, as it accounts for 75% of the eurozone economy.
Another important data release for the euro is trade balances. This indicator measures the difference between what a country makes from exports and what it spends on imports over a certain period of time. If a country produces highly popular exports, the currency acquires pure value from the extra demand generated from foreign buyers seeking to buy these goods. Therefore, a positive net trade balance strengthens the currency and vice versa.
