EUR/USD remains fragile as more ECB rate cuts in the pipeline
- EUR/USD recovers mildly while its outlook remains uncertain as the ECB is expected to extend its policy-easing cycle.
- A victory of Donald Trump in the US presidential elections would significantly impact the Eurozone economy.
- Investors expect the Fed to follow the rate-cut path gradually.
EUR/USD recovers mildly on Friday after posting a fresh 10-week low near 1.0800 on Thursday. The outlook of the major currency pair remains bearish as the Euro (EUR) could face selling pressures on expectations that more interest rate cuts from the European Central Bank (ECB) are in the pipeline.
The ECB reduced its Rate on Deposit Facility by 25 basis points (bps) to 3.25% on Thursday. This was the second straight interest rate cut by the ECB and the third of this year. The central bank was widely anticipated to reduce interest rates further as recent commentaries from various ECB officials suggested that they are more concerned about reviving economic growth, with high confidence over inflation remaining under control.
In the press conference after the interest rate decision, ECB President Christine Lagarde did not offer any cues for likely interest rate action in December but was confident that the disinflation process is well on track. However, traders have priced in an additional 25-bps interest rate cut at the last meeting of this year.
When asked about the likely threats to the Eurozone economy from a victory of former US President Donald Trump in the presidential elections, Lagarde said, “Any trade obstacles were a ‘downside’ for Europe,” Reuters reported. She added, "Any restriction, any uncertainty, any obstacles to trade matter for an economy like the European economy, which is very open," adding that the ECB was also "very attentive" to possible oil price moves linked to the Middle East conflict.
Daily digest market movers: EUR/USD strives to end its losing spree
- EUR/USD takes a breather on Friday after a four-day losing streak. The shared currency pair strives to hold its feet as the US Dollar (USD) rally appears to have paused. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to extend its upside above the immediate resistance of 103.90.
- The Greenback takes a time out, while its outlook remains firm as Thursday’s upbeat United States (US) data pointed to economic resilience. The US Retail Sales data, a key measure of consumer spending, rose at a faster-than-expected pace of 0.4% in September. Also, Initial Jobless Claims for the week ending October 11 came in lower at 241K than estimates of 260K.
- Over the past few weeks, the US Dollar has been outperforming its major peers as traders priced out market speculation of the Federal Reserve (Fed) to deliver another larger-than-usual interest rate cut of 50 basis points (bps) in November. As September US data has diminished fears of a potential slowdown, traders expect the Fed to cut interest rates gradually.
- According to the CME FedWatch tool, traders are pricing in two rate cuts of 25 basis points (bps) in November and December, which will push interest rates lower to 4.25%-4.50% by the year-end.
- Going forward, investors will focus on market expectations over the US presidential elections. Currently, there is a neck-to-neck competition between Donald Trump and Kamala Harris. According to FiveThirtyEight’s daily election poll tracker, Harris is leading polls and has a 2.4-percentage-point lead over Trump.
Technical Analysis: EUR/USD holds above 1.0800
EUR/USD endeavors to hold the immediate support of 1.0800 in European trading hours. The major currency pair extended its downfall after breaking below the 200-day Exponential Moving Average (EMA), which trades around 1.0910, 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 though entering in oversold conditions.
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.