- EUR/USD falls near 1.1050 as US Dollar strengthens ahead of US ISM Manufacturing PMI for August.
- The Fed and ECB are expected to cut interest rates this month.
- This week, investors will focus on the US NFP data for August.
EUR/USD retreats after failing to extend recovery above immediate resistance of 1.1080 in Tuesday’s European session. The major currency pair falls as the US Dollar (USD) clings to gains near a near two-week high as the Dollar Index (DXY), which tracks the value of the Greenback against six major currencies, trades near 101.80.
The US Dollar is showing strength as investors focus on the US (US) Non-Farm Payrolls (NFP) data for August, due on Friday. Investors will focus on the labor market data for clues on the possible size of the Federal Reserve’s (Fed) interest rate cut in September’s monetary policy. Market participants remain confident that the US central bank will pivot towards policy normalization this month.
According to the CME FedWatch tool, the probability of a 50 basis point (bps) interest rate cut in September is 31%, while the rest favor a 25 bps decrease to the 5.00%-5.25% range. The probability of a large rate cut has decreased from 36% the previous week, particularly after the revised estimate of second-quarter gross domestic product (GDP) indicated that the US economy grew at a faster pace of 3% from the preliminary assumption of 2.8%.
In Tuesday’s session, investors will focus on the S&P Global Manufacturing Purchasing Managers’ Index (PMI) and the US ISM data for August, which will be released at 13:45 and 14:00 GMT, respectively. The S&P Global PMI, which is a final estimate, is expected to come in at 48.0, similar to the preliminary estimate.
Meanwhile, the ISM report is expected to show that activities in the manufacturing sector contracted at a slower pace, with the PMI coming in at 47.5 from the previous release of 46.8.
Daily Market Moves: EUR/USD falls as ECB looks set to cut interest rates again
- EUR/USD is falling near 1.1050 in European trading hours. The major currency pair is facing strong pressure as the Euro is on the defensive amid strong speculation that the European Central Bank (ECB) will cut interest rates this month. This would be the second interest rate cut by the ECB as it pivoted to policy normalization in June, with policymakers confident that price pressures will return to the bank’s 2% target by 2025.
- Market speculation about ECB interest rate cuts in September has strengthened as price pressures in the Eurozone have eased significantly and signs of a possible recession in Germany have increased. Eurozone headline inflation eased to 2.2% in August due to a sharp drop in energy prices.
- The German economy contracted in the second quarter and is expected to go through a difficult phase due to weak demand from domestic and foreign markets.
- Meanwhile, ECB policymakers are also comfortable with market expectations for rate cuts in September. Bank of France Governor Francois Villeroy de Galhau told French magazine Le Point on Friday that “it would be fair and prudent to decide in favour of a further rate cut.” Villeroy added: “Unfortunately, our growth remains too weak,” and that “the balance of risks still needs to be monitored in Europe,” Reuters reports.
Technical Analysis: EUR/USD seeks support near the 20-day EMA
EUR/USD is trading within Monday’s trading range after stabilizing below the crucial resistance of 1.1100. The near-term outlook for the major currency pair remains firm as all short- to long-term exponential moving averages (EMAs) are sloping higher.
Earlier, the major currency pair strengthened after breaking above the Ascending Channel formation on a daily time frame.
The 14-day Relative Strength Index (RSI) has declined below 60.00 after turning overbought near 75.00.
On the upside, a recent high of 1.1200 and the July 2023 high of 1.1275 will be the next target for Euro bulls. Meanwhile, the downside is expected to remain cushioned near the psychological support of 1.1000.
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
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.
