- EUR/USD remains vulnerable amid uncertainty over a possible trade war between the Eurozone and the US.
- ECB member Olli Rehn sees the deposit facility rate heading towards the neutral rate in the first half of 2025.
- Investors await US inflation data and speeches from several Fed officials.
EUR/USD extends its losing streak for the fourth trading day and hits a new yearly low of 1.0592 during the European session on Wednesday, amid caution ahead of the US Consumer Price Index (CPI) data (US) for October, which will be published at 13:30 GMT.
The CPI report is expected to show that annual headline inflation accelerated to 2.6% from 2.4% in September. The core CPI, which excludes volatile food and energy prices, rose steadily by 3.3%.
Inflation data will influence market expectations about the Federal Reserve’s (Fed) likely monetary policy action in December. The Fed is expected to cut interest rates again by 25 basis points (bps) to 4.25%-4.50% next month, according to the CME FedWatch tool. However, the probability has decreased to 62% from 70% a week ago. Market expectations for a Fed interest rate cut in December have eased slightly lately, as investors expect the United States (US) economic outlook to improve and price pressures to increase under the administration. of President-elect Donald Trump.
Trump promised to increase import tariffs by 10% and reduce corporate taxes in his election campaign. This move will increase demand for domestic goods and stimulate labor demand and business investment, eventually leading to inflationary pressures and forcing the Fed to pursue a more gradual rate cut cycle.
On Tuesday, Federal Reserve Bank of Minneapolis President Neel Kashkari warned at a Yahoo! Finance, “If inflation surprises higher before December, that could give us pause.” Kashkari added that monetary policy is “moderately restrictive at this time,” and he expects economic growth to persist.
In Wednesday’s session, investors will also focus on speeches from several Fed officials for further guidance on interest rates.
What’s moving the market today: EUR/USD remains under pressure due to the underperformance of the Euro
- Last week’s underperformance of the Euro (EUR) across the board has also kept the major currency pair on the defensive. The Euro is depressed due to multiple headwinds, such as a possible trade war between the Eurozone and the US and the collapse of the three-party government in Germany.
- On Tuesday, European Central Bank (ECB) Governing Council member and Bank of Finland Governor Olli Rehn suggested that Europe should position itself better ahead of Trump’s second term. “If a trade war were to start, Europe should not be unprepared,” Rehn said. A trade war between both sides of the Atlantic seems likely, as Trump mentioned in his election campaign that the euro bloc would “pay a high price” for not buying enough American exports.
- When asked about his views on the ECB’s interest rate outlook, Rehn commented that the deposit rate could decline to the so-called neutral rate in the first half of 2025, Reuters reported. According to ECB staff, the neutral rate is around 2% or 2.25%.
- Meanwhile, the collapse of the three-party coalition in Germany after Chancellor Olaf Scholz fired Finance Minister Christian Linder last week has also been a major cause of weakness in the Euro. According to a report by Focus Online, Olaf will call a vote of confidence on December 18 and early elections on February 23.
- Going forward, investors will focus on ECB President Christine Lagarde’s speech for further guidance on interest rates, which is scheduled for Thursday.
Technical Analysis: EUR/USD remains weak near yearly lows around 1.0600
EUR/USD hovers around the new yearly low around 1.0600 in European trading hours on Wednesday. The major currency pair is expected to face further declines, with the 20-day EMA turning vertically southwards near 1.0800.
The return of the 14-day Relative Strength Index (RSI) to the 20.00-40.00 range indicates that the bearish momentum is gaining traction and adds evidence of further declines.
Looking down, the pair could fall near the psychological support of 1.0500 after breaking below 1.0600. On the other hand, the round level resistance of 1.0700 will be the key barrier for the Euro bulls.
The Euro FAQs
The Euro is the currency of the 19 countries of the European Union 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 turnover of more than $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), headquartered in Frankfurt, Germany, is the reserve bank of the eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main tool is the increase or decrease in interest rates. Relatively high interest rates (or the expectation of higher rates) tend to benefit the euro and vice versa. The Governing Council of the ECB makes decisions on monetary policy at meetings held eight times a year. Decisions are made by the directors of the Eurozone’s national banks and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), are an important econometric indicator for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts tend to benefit the euro, making the region more attractive as a place for global investors to park their money.
The published data measures the health of the economy and may have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence 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 may encourage the ECB to raise 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 eurozone economies (Germany, France, Italy and Spain) are especially significant, as they represent 75% of the eurozone economy.
Another important data that is published about 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 in-demand export products, its currency will gain value simply from the additional demand created by foreign buyers seeking to purchase those goods. Therefore, a positive net trade balance strengthens a currency and vice versa in the case of a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
