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EUR/USD gains further ground as US Dollar retreats and focus shifts to US inflation

  • EUR/USD rose to a fresh one-month high near 1.0850 amid US Dollar weakness ahead of US inflation data for June.
  • US Dollar Falls as Fed’s Powell Allays Fears of Persistent Inflation
  • The Euro is capitalising on easing fears of a financial crisis in France and diminishing prospects for ECB rate cuts.

EUR/USD marks a fresh one-month high around 1.0850 in the European session on Thursday. The major currency pair strengthens as the US Dollar (USD) faces selling pressure due to firm expectations that the Federal Reserve (Fed) will start cutting interest rates in September. The Dollar Index (DXY), which tracks the value of the Greenback against six major currencies, declines to near 104.90.

Market speculation about Fed rate cuts in September increased as comments by Fed Chairman Jerome Powell in semiannual testimony before Congress indicated that the central bank has made good progress on inflation and that labor market strength appears to have waned. Powell stopped short of declaring a victory on inflation and said rate cuts would be appropriate when policymakers gain confidence that inflation will return to the desired 2% rate.

For a meaningful guide on the interest rate outlook, investors await the US Consumer Price Index (CPI) data for June, due at 12:30 GMT. The CPI report is expected to show that core inflation, which excludes the volatile food and energy items, grew steadily by 0.2% and 3.4% on a monthly and annual basis, respectively. Annual headline inflation is estimated to have slowed to 3.1% from May’s reading of 3.3%, while the monthly figure is expected to have barely grown after remaining unchanged in May.

A scenario in which price pressures remain persistent or higher than expected would force traders to reduce bets on rate cuts in September. On the contrary, soft figures will be favorable for lower borrowing costs. A decline in US inflation would also increase confidence that the disinflation process has resumed and that the high price pressures recorded in the first quarter were just a short-term blip.

Daily Market Movers Roundup: EUR/USD Rises as ECB Rate Cut Prospects Fade

  • EUR/USD rises to 1.0850 as concerns over the financial crisis in France ease, as Marine Le Pen’s far-right party, National Rally, failed to maintain dominance over French President Emmanuel Macron’s centrist alliance and the left-wing coalition, also known as the New Popular Front, led by Jean-Luc Mélenchon.
  • Economists were concerned about the rise to power of the far right, which was expected to push for fiscal expansion. The centrist alliance is now expected to join forces with the left to form a coalition government.
  • Apart from the easing of fears of a financial crisis in France, the reduction in expectations of further rate cuts by the European Central Bank (ECB) has also brought stability to the attractiveness of the Euro.
  • Traders are reducing bets in favor of consecutive ECB rate cuts as ECB policymakers are hesitant to commit to a specific rate-cutting path. ECB officials fear that an aggressive approach could reignite price pressures again. However, they are comfortable with expectations for more rate cuts this year.
  • Meanwhile, revised estimates for Germany’s Harmonized Index of Consumer Prices (HICP) confirmed that price pressures slowed in June. The annual HICP grew at a slower pace of 2.5% from May’s reading of 2.8%.

Technical Analysis: EUR/USD Delivers Bullish Flag Breakout

EUR/USD strengthens after delivering a breakout of the Bullish Flag formation on a 4-hour time frame. A breakout of the mentioned chart pattern results in a continuation of the trend, which in this case is bullish.

The 20-period exponential moving average (EMA) near 1.0825 continues to provide support to the Euro bulls.

The 14-day Relative Strength Index (RSI) is set in the bullish range of 60.00-80.00, indicating that momentum has tilted to the upside.

Looking ahead, the psychological figure of 1.0900 will be a key target for Euro bulls. On the downside, the June 19 high around 1.0750 will be an important support zone.

Euro FAQs

The Euro is the currency of the 20 European Union countries that belong to the Eurozone. It is the second most traded currency in the world, behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB), based in Frankfurt, Germany, is the reserve bank of the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main instrument is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher rates – generally benefit the Euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of the national banks of the Eurozone and six permanent members, including ECB President Christine Lagarde.

Eurozone inflation data, as measured by the Harmonised Index of Consumer Prices (HICP), is an important econometric data point for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, the ECB is forced to raise interest rates to bring inflation back under control. Relatively high interest rates compared to their peers usually benefit the euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases measure the health of the economy and can influence the Euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can 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 can encourage the ECB to raise interest rates, which will directly strengthen the Euro. Conversely, if economic data is weak, the Euro is likely to fall. Economic data from the four largest Eurozone economies (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone economy.

Another important output 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 during a given period. If a country produces highly sought-after export products, its currency will appreciate due to the additional demand created by foreign buyers who wish to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

Source: Fx Street

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