EUR/USD advances as investors see limited trade war between US and China
- EUR/USD rises above 1.0400 as the risk-premium of the US Dollar eases amid diminishing fears of a global trade war.
- The ECB is expected to continue reducing interest rates amid confidence that the disinflation trend towards the 2% target is intact.
- Investors await the US ADP Employment Change and the ISM Services PMI for January.
EUR/USD advances above 1.0400 in Wednesday’s European session. The major currency pair gains as the US Dollar (USD) extends its losing streak for the third trading day.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near 107.50 as it loses some risk premium, with investors assuming that the scope of a trade war won’t be wider.
Market participants expect the trade war to be mainly between the United States (US) and China as the latter has retaliated against 10% levies by imposing tariffs on various US exports, including farm equipment, some autos, and energy items such as Coal and Liquefied Natural Gas (LNG).
With the rest of the world, investors expect US President Donald Trump will use tariffs as a tool to have a dominant position in negotiating deals with trading partners. President Trump's postponement of 25% tariffs on Canada and Mexico stemmed from expectations that tariffs are more of a political maneuver.
Meanwhile, the next trigger for the US Dollar (USD) will be the US Nonfarm Payrolls (NFP) data for January, which will be released on Friday. The official employment data is expected to influence speculation about the Federal Reserve’s (Fed) monetary policy guidance.
In Wednesday’s session, investors will focus on the US ADP Employment Change and the ISM Services Purchasing Managers Index (PMI) data for January.
Daily digest market movers: EUR/USD gains sharply despite Euro’s underperformance
- EUR/USD moves higher at the expense of the US Dollar as the Euro (EUR) underperforms against its major peers amid firm expectations that the European Central Bank (ECB) will continue with its policy-easing spree, given that officials are confident about inflation sustainably returning to the central bank’s target of 2% this year.
- In Wednesday’s European session, ECB Vice President Luis de Guindos said in an interview with the Slovak newspaper Hospodarske Noviny that he sees “inflation approaching the ECB's target” but expects “little uptick in next few months on energy”. When asked about for how long the ECB will continue reducing its borrowing rates, de Guindos said, “Even if our current trajectory under the current circumstances is clear, nobody knows the level at which interest rates will end up."
- Last week, the ECB reduced its Deposit Facility rate by 25 basis points (bps) to 2.75% and guided that the monetary policy is still restrictive. Traders expect the ECB to cut interest rates three times more in the next three policy meetings.
- Meanwhile, market participants are cautious about the Eurozone outlook amid fears that the European Union (EU) will be the next on the list of US President Trump on whom he can threaten to impose tariffs actively. Over the weekend, Trump said that tariffs would definitely happen with the European Union because “they've really taken advantage of us".
Technical Analysis: EUR/USD rebounds to near 1.0400
EUR/USD recovers from its three-week low of 1.0210 reached on Monday. However, the pair is still below the 50-day Exponential Moving Average (EMA), which trades around 1.0440, suggesting that the overall trend is still bearish.
The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting a sideways trend.
Looking down, the January 13 low of 1.0177 and the round-level support of 1.0100 will act as major support zones for the pair. Conversely, the psychological resistance of 1.0500 will be the key barrier for the Euro bulls.
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.