Euro appears offered and vulnerable to extra declines
- Euro keeps the trade near 1.1040 against the US Dollar.
- Stocks in Europe trade mostly with gains on Tuesday.
- EUR/USD’s earlier bullish attempt evaporated near 1.1090 .
- Germany’s Business Climate surprises to the downside in July.
- US Consumer Confidence came in above estimates.
The Euro (EUR) maintains the bearish performance well in place against the US Dollar (USD), forcing EUR/USD to drop further and record new lows in the vicinity of 1.1020 on turnaround Tuesday.
Earlier in the day, the pair reached daily highs in the range of 1.1085/90, but failed to maintain the momentum, leading to a corrective move towards new lows around 1.1040. This downward trend was aided by a lower-than-expected Business Climate in Germany, as tracked by the IFO institute, as well as the persistent upside bias in the Greenback.
Looking ahead, we can expect a higher level of volatility in the currency pair as both the Federal Reserve and the European Central Bank (ECB) have important meetings scheduled for later in the week. Furthermore, both central banks are expected to raise interest rates by 25 basis points (bps), but there is a growing divergence in their short-term plans for future tightening.
On this, the Fed appears to be nearing the end of its hiking cycle, suggesting a potential pause or slowdown in the future. In contrast, some officials from the ECB have recently expressed less hawkish views on the likelihood of further rate hikes beyond the summer.
In the euro docket, the IFO’s Business Climate for the month of July fell short of expectations, coming in at 87.3.
Meanwhile, in the US, the S&P/Case-Shiller Home Price index contracted 1.7% in the year to May and the FHFA’s House Price Index rose 0.7% MoM in the same period. Finally, the Conference Board’s Consumer Confidence index improved beyond consensus to 117 for the current month.
Daily digest market movers: Euro loses the grip and drops to 2-week lows
- The EUR trades in the lower end of the current range against the USD.
- The USD Index seems to have met some initial hurdle around 101.50.
- Investors see the Fed and the ECB hiking rates this week.
- US, German yields rebound mildly in the European morning.
- The Fed starts its 2-day meeting later today.
Technical Analysis: Euro risks further downside in the short term
EUR/USD extends its decline to the 1020 region on Tuesday.
Further downside, the EUR/USD pair should meet immediate contention at the weekly low of 1.1025 ahead of the psychological 1.1000 mark, all seconded by provisional support at the 55-day and 100-day Simple Moving Averages (SMA) at 1.0900 and 1.0890, respectively. The loss of this region could open the door to a potential visit to the July 6 low of 1.0833 ahead of the key 200-day SMA at 1.0699 and the May 31 low of 1.0635. South from here emerges the March 15 low of 1.0516 before the 2023 low of 1.0481 on January 6.
On the upside, the next hurdle appears at the 2023 high at 1.1275 reached on July 18. Once this level is cleared, there are no resistance levels of significance until the 2022 peak of 1.1495 recorded on February 10.
The constructive view of EUR/USD appears unchanged as long as the pair trades above the key 200-day SMA.
Euro FAQs
The Euro is the currency for the 20 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.