- The Euro reverses two consecutive daily falls and recovers ground.
- European stock markets open slightly offered on Tuesday.
- The improvement in the risk complex helps the pair so far.
- US traders return to the market after the holiday on Monday.
- Investors’ attention remains on the future moves of the Fed and the ECB.
- Caution is expected to pick up ahead of Powell’s remarks.
The European currency (EUR) has gained some bullish momentum, which has led to the EUR/USD to ignore two consecutive daily declines and resume its recent uptrend on Tuesday’s reversal. The pair is up 35 pips, rising from daily lows at 1.0910 to a new high of the day at 1.0945.
This improvement in sentiment towards riskier assets can be partly attributed to the recent decision by the People’s Bank of China (PBoC) to cut its one-year medium-term lending facility (MLF) by 10 basis points, with the aim of prop up the Chinese economy as it emerges from the pandemic.
Investors are closely watching potential interest rate decisions by the Federal Reserve and the European Central Bank (ECB), as both are expected to resume their raising campaigns in July.
In Germany, producer prices fell 1.4%m/m in May but rose 1.0%y/y, while data on the current account and finished construction products will be released in the eurozone ahead of speeches by members of the ECB Council, E. McCaul and L. De Guindos.
In the US, real estate will be the main focus of attention, with speeches by J. Bullard, a member of the St. Louis Fed (a 2025 hawker), and J. Williams, a member of the New York Fed (a permanent voter centrist), also on the agenda.
Market Drivers: Euro Bulls Regain Control of Sentiment
- The renewal of optimism in the markets puts pressure on the US dollar.
- The PBoC lowers the Medium Term Loan Facility (MLF) to 1 year to support the ongoing slow economic rebound.
- The testimonials of the Federal Reserve Chairman, Jerome Powell, will be the important events to follow this week.
- Currently, the main factor influencing the price movement of the currency pair is the divergence in policies between the ECB and the Fed.
Technical Analysis: Attention back to 1.1000
The EUR/USD pair has pulled back slightly from its recent monthly high of 1.0970, reached on June 16. To continue its bullish momentum, the Euro must quickly break above this level, which could allow it to reach the psychological barrier of 1,1000. Other resistance levels include the 2023 high at 1.1095 (April 26), the round level of 1.1100 and the weekly maximum of 1.1184 (March 31, 2022), which is supported by the 200-week SMA, currently at 1.1181.
Should the bears take over, there is a provisional containment on the 55-day SMA in 1.0881. If this level is broken, there are no significant support levels until the May low in 1.0635 (May 31), followed by the March low in 1.0516 (March 15) and the 2023 low in 1.0481 (January 6th).
Frequently asked questions about the Euro
What is the Euro?
The Euro is the currency of the 20 countries of the European Union that belong to the euro zone. 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 more than $2.2 trillion per day.
EUR/USD is the most traded currency pair in the world, with an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2% ).
What is the ECB and how does it influence the Euro?
The European Central Bank (ECB), with headquarters in Frankfurt (Germany), is the reserve bank of the euro area. 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 – tend to benefit the euro and vice versa.
The Governing Council of the ECB makes monetary policy decisions in meetings that are held eight times a year. Decisions are made by the heads of the eurozone’s national banks and six permanent members, including ECB President Christine Lagarde.
How do inflation data influence the value of the Euro?
Eurozone inflation data, measured by the Consumer Price Index (CPI), is important econometric data for the euro. If inflation rises more than expected, especially if it exceeds the 2% target set by the ECB, the ECB is forced to raise interest rates to bring inflation back under control.
Relatively high interest rates compared to their peers tend to benefit the euro as it makes the region more attractive as a place for global investors to park their money.
How do economic data influence the value of the Euro?
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 may encourage the ECB to raise interest rates, which will directly strengthen the euro. Conversely, if the economic data is weak, the euro is likely to fall.
The economic data for the four largest economies in the Eurozone (Germany, France, Italy and Spain) are especially significant, as they represent 75% of the Eurozone economy.
How does the trade balance affect the Euro?
Another important 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 during a given period.
If a country produces sought-after export products, its currency will appreciate due to the additional demand created by foreign buyers who want to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative trade 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.
