- As the US Dollar continues to fall, EUR/USD further rises to 1.0880.
- The US dollar is falling even as investors expect the Fed to return to policy normalization in the final quarter of the year.
- ECB policymakers have refused to commit to further rate cuts since June.
EUR/USD hit a new weekly high at 1.0880 in the European session on Tuesday. The major currency pair rose amid a weaker US Dollar (USD) and growing uncertainty regarding the pace at which the European Central Bank (ECB) will cut its key borrowing rate after its June meeting.
The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, fell to 104.40. Investor expectations that the Federal Reserve will cut interest rates at its September meeting have faded significantly, but the dollar faces a tough backdrop. According to the CME FedWatch tool, the probability that the Fed will maintain its current policy framework in September has risen to 50% from about 35% a week ago.
A strong U.S. economic outlook and hawkish interest rate guidance from policymakers have forced traders to scale back their interest rate bets. Market speculation about a Fed rate cut this week will be driven by April core personal consumption expenditures price index (PCE) data, due on Friday. Core PCE inflation data, the Fed’s preferred inflation measure, is estimated to be stable on a monthly and annual basis.
Daily Digest Market Trends: EUR/USD Takes Advantage of US Dollar Weakness
- EUR/USD extended its gains for the third consecutive trading day on Tuesday. The common currency pair surged to 1.0880 amid intensifying debate over the direction of interest rate cuts by the European Central Bank. Barring any surprises, the ECB is expected to cut interest rates at its monetary policy meeting on June 6. As such, investors are debating how much and at what pace the ECB will ease monetary policy beyond June.
- ECB policymakers have refused to commit to a pre-determined path for rate cuts, preferring to remain data-dependent. Meanwhile, several policymakers have warned that adopting aggressive policy easing could again intensify price pressures, which has also affected market speculation about the ECB’s annual rate cut. Investors now expect the ECB to cut its key borrowing costs once more after June. A week ago, investors were expecting three rate cuts in 2024, compared to six at the start of the year.
- On Monday, François Villeroy de Galhau, a European Central Bank policymaker and governor of the Bank of France, said in an interview with German newspaper Belsen-Zeitung that a cut in June is a decision that has been made, and that discussions are on how much and how fast interest rates will fall. Villeroy dismissed the suggestion of one cut per quarter, saying, “I’m not saying that we should already decide in July, but I want to keep myself open about the timing and the pace.”
- On the same day, Reuters reported that ECB Chief Economist Philip Lane said in a speech in Dublin that the pace of interest rate cuts would depend on the strength of underlying inflation and demand. If there are no unexpected upside risks to inflation and demand, the ECB can deploy an aggressive approach to interest rate cuts, but if there are upside risks to inflation and demand, the ECB will be forced to gradually lower interest rates.
- A big trigger for euro price movement this week will be the euro zone’s preliminary inflation data for May, due out on Friday. The inflation figures will provide further clues as to whether the ECB will extend its rate cuts into July. But before then, investors will be keeping an eye on Germany’s preliminary May inflation figures, due out on Wednesday. Monthly headline and headline inflation rates are expected to slow by 0.2%. Annual headline inflation is forecast to accelerate to 2.7% from 2.4% in April.
Technical analysis: EUR/USD hits new weekly high at 1.0880
EUR/USD rises to 1.0880 ahead of key Eurozone/US inflation data releases. The major currency pair is firmly holding onto a breakout of a symmetrical triangle chart pattern formed on the daily chart, signaling broader strength.
The short-term outlook for this common currency pair remains strong as it is trading well above all of its short- to long-term exponential moving averages (EMAs).
The 14-period Relative Strength Index (RSI) has fallen to the 40.00-60.00 range, suggesting that the upward momentum has faltered for now.
The major currency pair is likely to revisit its two-month high near 1.0900. A decisive breakout above this level would push the asset towards the March 21 high near 1.0950 and psychological resistance at 1.1000. However, a dip below the 200-day EMA at 1.0800 could drag the asset further down.
Frequently asked questions about the Euro
The euro is the currency of 20 European Union countries that belong to the eurozone. It is the second most traded currency in the world after the US dollar. In 2022, Accounted for With 31% of all foreign exchange trading and an average daily volume of over $2.2 trillion, EUR/USD is the most traded currency pair in the world. accounting All trades are off around 30% followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mission is to maintain price stability, which means either keeping inflation down or stimulating growth. The ECB’s main tool is to raise or lower interest rates. Relatively higher interest rates, or the expectation of rising interest rates, typically benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight meetings per year. Decisions are made by the heads of the eurozone national banks and the six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric input for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s target of 2%, the ECB will be forced to raise interest rates to keep inflation in check. Relatively high interest rates compared to other countries usually benefit the euro, as they make the eurozone a more attractive place for global investors to park their funds.
Data released measures the health of the economy and can affect 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, it can also trigger the ECB to raise interest rates, which directly strengthens the euro. On the other hand, weak economic data can cause the euro to weaken. Economic data from the eurozone’s four largest economies (Germany, France, Italy, and Spain) is particularly important as they account for 75% of the eurozone’s economy.
Another important piece of data about the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces exports that are in high demand, its currency will only increase in value due to the additional demand it generates from foreign buyers looking to purchase these goods. So a positive trade balance makes a currency stronger, and a negative one makes it stronger.
