Forex Trading, News, Systems and More

EUR/USD poised just below 1.0900 ahead of ECB policy announcement


Share:

  • The European Central Bank is set to announce its policy decision and projections on Thursday. 
  • ECB’s Lagarde will hold a press conference and volatility for EUR/USD is expected. 
  • The short-term uptrend continues to struggle higher even as positive Eurozone data contrasts with US results.  

EUR/USD is trading in the 1.0890s on Thursday prior to a fanfare event for the FX markets this week – the European Central Bank (ECB) policy announcement, scheduled for 13:15 GMT. 

The EUR/USD pair made it all the way up to ding-a-ling 1.0900 on Wednesday after the release of better-than-expected German trade and Eurozone Retail Sales data boosted the Single Currency. Now traders appear to be in wait-and-see mode prior to hearing the results of the ECB’s roundtable. 

Euro could weaken on talk of conditions for a cut

It is highly unlikely the gentlefolk of Frankfurt will decide to cut the ECB’s main refinancing operations rate from 4.5% at the meeting. Current market expectations are for the first interest rate cut to come in June. 

According to analysts at ING bank, what is more likely is that the bank will clarify the economic conditions that would prompt a cut. Such talk will probably have a slightly negative impact on EUR/USD, though it is not seen breaking below 1.0800. 

“President Lagarde may start laying out the conditions for easing policy. That may be perceived as slightly dovish, meaning a softer EUR and a re-flattening of the money market curve are tangible risks.” Says Benjamin Schroeder, Senior Rates Strategist at ING. 

February inflation data for the Eurozone showed a decline to 2.6% from 2.8%. This is not far from the ECB’s 2.0% target, however, core inflation remains sticky at 3.1%, notes FXStreet’s Yohay Elam in his preview, suggesting persistent base effects will act as a restraint on the ECB. At the same time, flatlining growth in the region is a compelling counter-reason for the ECB to lower interest rates. 

On the Horizon

Apart from the ECB meeting, the next big event for the pair is US Nonfarm Payroll data out on Friday at 13:30 GMT. If the jobs data is soft, in line with the ADP and JOLTS Job Openings data from earlier in the week, it could weigh on the USD and give EUR/USD another boost. 

Also on Friday is the final estimate of Eurozone GDP data out at 10:00 GMT, with no-change in the run of sclerotic growth foreseen for the fourth quarter. If the revision tips into negative territory it will make the argument for a rate cut sooner all the more compelling, weighing on EUR/USD. 

Technical Analysis: Euro’s slow ascent continues

Turning to the charts, the EUR/USD continues its laborious climb from February’s 1.06 base-camp lows. In the short term, the peaks and troughs are rising, suggesting a tentative uptrend is in progress that slightly favors bulls. The longer-term trend is sideways and difficult to forecast. 

Euro vs US Dollar: 4-hour chart

The daily chart below shows buyers seem to have now successfully slain key resistance from the 50-day Simple Moving Average (SMA) at 1.0859 (orange line) and established a tentative foothold above. This is a bullish sign, reinforcing the validity of the short-term uptrend.  

Euro vs US Dollar: 1-day chart

The next target to the upside now is the 61.8% Fibonacci retracement of the early 2024 decline, at 1.0972. A break above that level would further encourage confidence from bulls. 

A break beneath the 1.0795 lows would spoil the buyer’s party and indicate a vulnerability to break down. 

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.