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13 Sep 2024
EUR/USD strengthens as soft US PPI propels Fed large rate cut bets
- EUR/USD rises as increasing bets of a large cut by the Federal Reserve weigh on the US Dollar.
- The ECB said it remains data-dependent for further monetary policy action after Thursday’s cut.
- ECB's President Lagarde refrained from providing a specific interest-rate cut path.
EUR/USD jumps to near 1.1100 in Friday’s European session. The major currency pair rises as the Euro (EUR) strengthens following the European Central Bank’s (ECB) monetary policy announcement on Thursday, and the US Dollar (USD) weakens after soft United States (US) Producer Price Index (PPI) data for August. The ECB cuts its Rate On Deposit Facility by 25 basis points (bps) to 3.50%, as widely anticipated.
The central bank was already expected to cut its key borrowing rates as the Eurozone economic outlook appears to have faltered due to a weak demand environment and price pressures in the old continent continue to decelerate.
The outlook of the Euro has improved due to the absence of a pre-defined interest rate cut path in the monetary policy statement and ECB President Christine Lagarde’s press conference. Comments from Lagarde indicated that the central bank will follow a data-centric approach, saying, "the interest rate decisions will be based on its assessment of inflation outlook in light of incoming economic and financial data, dynamics of underlying inflation and strength of monetary policy transmission," at the press conference.
For the remainder of the year, market participants see the ECB reducing interest rates one more time as price pressures are expected to soften further. In the late Asian session, ECB policymaker Joachin Nagel told German radio Deutschlandfunk, "We assume that core inflation will improve, especially with the declining wage trend in the Eurozone.”
In the economic data front, Eurozone Industrial Production decreased by 2.2% year-over-year (YoY) in July, Eurostat reported on Friday. The number was better than the -2.7% expected and the -4.1% (revised from -3.9%) seen in June. On a monthly basis, Industrial Production decreased by 0.3%, as expected.
Daily digest market movers: EUR/USD gains as US Dollar slides further
- EUR/USD strengthens at the expense of a weak US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its downside to near 101.00. The Greenback faces sharp selling pressure as market speculation for the Federal Reserve (Fed) to reduce interest rates by 50 basis points (bps) on Wednesday soars.
- According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September has increased sharply to 43% from 14% after the US PPI data release.
- Thursday’s PPI data showed that the producer inflation grew at a slower-than-expected pace year-over-year in August. The headline inflation rose by 1.7%, slower than the estimates of 1.8% and from 2.1% in July, downwardly revised from 2.2%. In the same period, the core producer inflation – which excludes volatile food and energy prices – rose steadily by 2.4%, slower than expectations of 2.5%.
- A slower pace in the price increase of goods and services at factory gates suggests a sluggish consumer spending trend, which historically prompts Federal Reserve (Fed) interest rate cut bets.
- Going forward, investors will focus on the preliminary Michigan Consumer Sentiment Index data for September, which will be published at 14:00 GMT. The sentiment data is estimated to have remained almost steady at 68.0 from the prior release of 67.9.
Technical Analysis: EUR/USD bounces back strongly from 1.1000
EUR/USD soars after retesting the breakout of the Rising Channel chart pattern formed on a daily timeframe near the psychological support of 1.1000. The near-term outlook of the major currency pair has strengthened as it has climbed above the 20-day Exponential Moving Average (EMA), which trades around 1.1055.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range. A bullish momentum would trigger after breaking above 60.00.
Looking up, last week’s high of 1.1155 and the round-level resistance of 1.1200 will act as major barricades for the Euro bulls. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support zones.
Euro FAQs
The Euro is the currency for the 20 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.