- EUR/USD remains inside the woods as the ECB is expected to cut interest rates again in December.
- ECB’s Lagarde will provide fresh cues on the interest rate outlook on Tuesday.
- Fed policymakers see smaller interest rate cuts as appropriate.
EUR/USD trades close to a fresh 11-week low near the round-level support of 1.0800 in Tuesday’s European session. The major currency pair is under pressure due to multiple headwinds, such as escalating European Central Bank (ECB) dovish bets and a firm US Dollar (USD).
Traders have priced in the ECB to cut interest rates again in the December meeting as growing risks to Eurozone’s economic growth are expected to keep inflationary pressures within striking distance of the central bank’s target of 2%. This would mean the fourth interest rate cut by the ECB this year.
Data released on Monday showed that the German Producer Price Index (PPI) deflated by 1.4% year-over-year (YoY) in September, faster than 0.8% in August, and pointed to the inability of producers to raise prices of goods and services at factory gates due to weak household spending.
On Monday, Slovak central bank chief and ECB policymaker Peter Kazimir said he is increasingly confident that the disinflation trend is intact. However, he wants to see more evidence before declaring a victory over inflation.
Meanwhile, the commentary from Lithuanian central bank governor and ECB Governing Council member Gediminas Šimkus appeared to be more dovish. Šimkus said, “If the disinflation processes get entrenched, it’s possible that rates will be lower than the natural level.” The ‘natural level’ of interest rates is between 2% and 3%.
In Tuesday’s session, investors will pay close attention to ECB President Christine Lagarde’s interview with Bloomberg and her participation in a panel discussion during the International Monetary Fund (IMF) meeting in Washington. Lagarde is expected to provide fresh guidance on interest rates.
Daily digest market movers: EUR/USD stays on backfoot on US election jitters
- EUR/USD remains fragile near the immediate support of 1.0800 as the US Dollar (USD) clings to gains near a fresh 11-week high. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, holds onto gains near 104.00. The Greenback gains on United States (US) presidential election jitters and growing expectations that the Federal Reserve (Fed) will follow a moderate policy-easing cycle.
- Latest polls have shown a neck-to-neck competition between former US President Donald Trump and Vice President Kamala Harrish ahead of elections, which are just two weeks away. Trump’s victory is expected to result in higher import tariffs and lower taxes, which could prompt the Fed to raise interest rates further.
- Meanwhile, the Fed is expected to cut interest rates by 25 basis points (bps) in November and December, according to the CME FedWatch tool. The reasoning behind firm speculation for a slower rate-cut cycle is investors’ growing confidence in US economic resilience after upbeat Nonfarm Payrolls (NFP), ISM Services PMI, and the Retail Sales data for September. Also, Fed officials see a gradual rate-cut path as appropriate.
- This week, investors will keep an eye on the preliminary S&P Global Purchasing Managers Index (PMI) data for October, which will be published on Thursday.
Technical Analysis: EUR/USD remains below 1.0850
EUR/USD struggles to hold the immediate support of 1.0800 in European trading hours. The outlook of the major currency pair remains uncertain as it trades below the 200-day Exponential Moving Average (EMA), which trades around 1.0900.
The downside move in the shared currency pair started after a breakdown of a 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. However, a recovery move remains on the cards as conditions turn oversold.
On the downside, the major could find support near the 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.
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