Euro risks a deeper pullback near term
- Euro trades in an inconclusive fashion vs. the US Dollar.
- Stocks in Europe extend the weekly decline on Friday.
- EUR/USD met some support near 1.0850 earlier in the week.
- The USD Index (DXY) trades close to its recent top around 103.60.
- EMU final inflation figures are due next on the domestic docket.
- The US calendar appears empty at the end of the week.
The Euro (EUR) navigates within a narrow trading range vs. the US Dollar (USD), motivating EUR/USD to orbit around the 1.0870 region amid the broad-based inconclusive trends in the risk-associated universe on Friday.
At the same time, the Greenback looks firm, although the multi-week rally appears to have bumped into a decent resistance area near 103.60 (August 16) when measured by the USD Index (DXY). The loss of traction in the Dollar also comes in line with the corrective decline in US yields across different maturities.
When looking at the broader context of monetary policy, there is renewed discussion about the Federal Reserve’s stance of maintaining a tighter policy for an extended period. This is driven by the resilience of the US economy, despite some easing in the labor market and lower inflation readings in recent months.
Within the European Central Bank (ECB), there are internal disagreements among its Council members regarding the continuation of tightening measures after the summer period. These disagreements are causing renewed weakness in the Euro.
Turning to economic data, the only release of note will be the final Inflation Rate in the broader euro area for the month of July.
Daily digest market movers: Euro remains under pressure well below 1.0900
- The EUR exchanges ups and downs vs. the USD at the end of the week,
- Investors remain worried about China’s sluggish recovery.
- Inflation in Japan came in above estimates for the month of July.
- Retail Sales in the UK missed expectations during last month.
- The persistent Fed’s tighter-for-longer narrative keeps markets cautious.
Technical Analysis: Euro could slip back to the 1.0830 region
In case of further losses, EUR/USD could retest the July low of 1.0833 (July 6) ahead of the significant 200-day SMA at 1.0790, and eventually the May low of 1.0635 (May 31). Deeper down, there are additional support levels at the March low of 1.0516 (March 15) and the 2023 low at 1.0481 (January 6).
Occasional bullish attempts, in the meantime, are expected to meet initial hurdles at the August high at 1.1064 (August 10) prior to the weekly top at 1.1149 (July 27). If the pair clears the latter, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 (July 18). Once this region is surpassed, significant resistance levels become less prominent until the 2022 high at 1.1495 (February 10), which is closely followed by the round level of 1.1500.
Furthermore, the positive outlook for EUR/USD remains valid as long as it remains above the important 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.