- EUR/USD extends its downside to near 1.0850 as traders brace for the ECB policy meeting.
- The ECB is expected to cut its key borrowing rates by 25 bps for the second straight meeting.
- Growing speculation for Trump’s victory has strengthened the US Dollar.
EUR/USD exhibits weakness near 1.0850 on Thursday. The major currency pair faces sharp selling pressure ahead of the European Central Bank’s (ECB) interest rate decision, which will be announced at 12:15 GMT.
Traders expect the ECB to reduce its Rate on Deposit Facility further by 49 basis points (bps) in the remaining two meetings this year, according to a note from Citi on Tuesday, suggesting that there will be two rate cuts of 25 bps on Thursday and in December.
A quarter-to-a-percentage rate cut on Thursday will be the second in a row, pushing the deposit facility rate lower to 3.25%. A dovish decision from the ECB is widely anticipated as the Eurozone economy appears to be on the path of an economic slowdown, with price pressures seeming under control.
With high confidence in the ECB to reduce interest rates again, investors will pay close attention to the monetary policy statement and ECB President Christine Lagarde’s press conference to get fresh cues about the likely monetary policy action in December.
Christine Lagarde is expected to talk more about reviving economic growth as the Eurozone Harmonized Index of Consumer Prices (HICP) has decelerated to 1.8% in September, according to flash estimates. The latest economic projections from the German economic ministry showed that the nation is expected to conclude the year with a decline in the overall output by 0.2%.
Daily digest market movers: EUR/USD weakens on multiple headwinds
- EUR/USD extends its losing streak for the fourth trading day on Thursday. The major currency pair declines to a more than 10-week low near 1.0850 as the US Dollar (USD) has performed strongly in the past few weeks. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, jumps to near 103.60, the highest level seen in over two months.
- The Greenback remains firm as traders have priced out expectations of the continuation of hefty rate cuts from the Federal Reserve (Fed) and growing speculation of former US President Donald Trump’s victory in presidential elections, scheduled on November 5.
- Market participants expect the Fed to cut interest rates moderately in the remainder of the year as fears of a United States (US) economic slowdown have been subsided by robust growth in the Nonfarm Payrolls (NFP) and the Services Purchasing Managers’ Index (PMI) data for September.
- Meanwhile, Trump’s victory over Democratic Vice President Kamala Harris is expected to result in higher tariffs on imports from Asian and European peers, tax cuts, and loosening financial conditions that will benefit the US Dollar.
- On the economic front, investors will focus on the US monthly Retail Sales data for September, which will be published at 12:30 GMT. Economists expect Retail Sales to have grown by 0.3%.
Technical Analysis: EUR/USD weakens to 1.0850
EUR/USD slides further to near 1.0850 in European trading hours. The major currency pair extends its downfall after breaking below the 200-day Exponential Moving Average (EMA), which trades around 1.0900, earlier this week.
The downside move in the shared currency pair started after a breakdown of the Double Top formation on a daily timeframe near the September 11 low at around 1.1000, which resulted in a bearish reversal.
The 14-day Relative Strength Index (RSI) dives below 30.00, indicating a strong bearish momentum.
On the downside, the major could find support near the round-level figure of 1.0800 and upward-sloping trendline at 1.0750, which is plotted from the October 3 low around 1.0450. Meanwhile, the 200-day EMA and the psychological figure of 1.1000 will be the key resistances for the pair.
Euro FAQs
The Euro is the currency for the 19 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.
Read the full article here