- EUR/USD remains sensitive as investors await new interest rate guidance from a number of Fed speakers.
- The euro weakened as President Trump's policies were expected to weigh on euro zone exports.
- This week, investors will focus on October's US inflation data.
In European trading on Monday, EUR/USD is trading cautiously near a four-month low of 1.0700. Major currency pairs remain tense as the election of Republican Donald Trump as US president strengthens the long-term outlook for the US dollar (USD). The US Dollar Index (DXY), which measures the value of the US dollar against six major currencies, has risen to nearly 105.00.
During his campaign, Trump promised to raise import tariffs and cut taxes, which would increase inflationary pressures and push up debt levels in the United States. According to a Nov. 6-7 Reuters poll, 62% of respondents (including 94% of Democrats and 34% of Republicans) said that President Trump's policies were likely to increase the U.S. national debt. It's expensive.''
President Trump's proposed tax cuts could add $7.5 trillion to the national debt over the next 10 years, according to the bipartisan Committee for a Responsible Federal Budget.
This week, investors will be paying close attention to speeches from a number of Federal Reserve officials for new clues about monetary policy actions expected in December. According to the CME FedWatch tool, there is a 65% chance that the central bank will cut the rate by 25 basis points (bp) again in December, to 4.25-4.50%. The Fed also lowered its key borrowing rate last week, marking the second straight quarter of 1% interest rate cuts by the Fed.
On the economic front, investors will focus on October US Consumer Price Index (CPI) data, which will be released on Thursday. The impact of inflation data on the interest rate outlook is expected to be only nominal, as Fed officials remain confident of the disinflation trend towards the Fed's 2% target. However, significant deviations from consensus can also affect consensus.
Daily Digest Market Trends: EUR/USD under pressure amid outlook for weaker euro
- EUR/USD remains tense as the outlook for the euro (EUR) is uncertain due to expectations of a global trade war following Trump's victory in the US presidential election. During his campaign, President Trump warned that European countries would have to pay a heavy price for not buying enough American exports.
- The impact of President Trump's victory is clearly felt among European economic leaders. “The sense of crisis is higher today than a week ago,” former European Central Bank (ECB) President Mario Draghi said at a European Union (EU) summit on Friday, according to Reuters.
- Domestic problems in the euro area's main member states are also weakening the euro's appeal. The collapse of Germany's three-party coalition government comes at a time when the economy is going through difficult times. Germany managed to avoid a technical recession with an impressive quarter-on-quarter growth of 0.2% in the third quarter, according to data released by the German Federal Statistical Office on October 30th. However, political uncertainty may lead to deferrals of government spending and investment.
- Meanwhile, investors are looking for new clues about the ECB's expected interest rate policy at its December meeting. ECB policymaker and Austrian National Bank President Robert Holzmann said there was currently no reason for the central bank not to cut interest rates next month, but that any decision would be based on economic data released in December. .
Technical analysis: EUR/USD remains low around 1.0700
EUR/USD is trading in a narrow range around 1.0700, a nearly four-month low. The short-term trend of major currency pairs remains bearish as the 20-day and 50-day exponential moving averages (EMAs) continue to decline around 1.0840 and 1.0910, respectively.
The 14-day Relative Strength Index (RSI) is fluctuating around 40.00. Once RSI (14) falls below that level, bearish momentum resumes.
The upward trend line around 1.0800, drawn from the April 16 low around 1.0600, will serve as a key resistance zone for euro (EUR) bulls. On the downside, the common currency pair could fall to a year-to-date low of 1.0600.
Euro Frequently Asked Questions
The euro is the currency of the 19 European Union countries that belong to the euro area. It is the second most traded currency in the world after the US dollar. In 2022, Accounted for It accounts for 31% of all foreign exchange transactions and has an average daily trading volume of over $2.2 trillion. EUR/USD is the most frequently traded currency pair in the world. accounting An estimated 30% discount on all transactions, 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 of the euro area. The ECB sets interest rates and controls monetary policy. The ECB's main task is to maintain price stability, which means controlling inflation or stimulating growth. The main means is to raise or lower interest rates. Relatively high interest rates, or expectations of rising interest rates, usually benefit the euro, and vice versa. The ECB Governing Council decides monetary policy at its eight annual meetings. Decisions will be made by the heads of the euro zone national banks and the six permanent members of the ECB, including ECB President Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric indicator for the euro. If inflation rises more than expected, especially above the ECB's 2% target, the ECB will mandate interest rate hikes to rein in inflation. Relatively high interest rates compared to other countries typically benefit the euro, as it makes the region more attractive to global investors as a place to park their funds.
The data release will gauge the health of the economy and could have an 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 would that attract more foreign investment, but it could also prompt the ECB to raise interest rates, which could directly lead to a stronger euro. Otherwise, if economic indicators are weak, the euro is likely to weaken. Economic data for the euro area's four largest economies (Germany, France, Italy and Spain) is particularly important, as they account for 75% of the euro area economy.
Another important data regarding 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 highly sought-after export goods, the value of its currency increases purely due to the additional demand generated from foreign buyers seeking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
