- EUR/USD is rising as investors focus on a number of economic indicators from both the US and the Eurozone.
- The German economy is expected to contract at an annual rate of 0.3% in the third quarter, while the eurozone as a whole is expected to grow 0.8% year-on-year.
- Amid the uncertainty surrounding the US presidential election, there is a possibility that risk aversion will continue.
EUR/USD rose slightly above 1.0800 in European trading on Monday. Major currency pairs are broadly flat ahead of a data-packed week in which traders are expected to receive economic growth and inflation data from both the United States and the euro zone. This data is usually the two key indicators that determine the direction of interest rates. currency driver.
Investors are expected to pay close attention to economic growth data in the euro zone, as inflation is expected to hover around the European Central Bank's (ECB) target of 2%. Economists expect the eurozone economy to grow 0.8% year-on-year, faster than the 0.6% expansion in the second quarter. Economists expect the euro area to grow by 0.2% in the third quarter when compared to the second quarter of 2024, at the same pace as the previous quarter.
The largest contribution to the eurozone economy is expected to come from Spain and other economies, as the economy of Germany, the largest country, is expected to contract by 0.3% year-on-year in the third quarter.
On the sidelines of an International Monetary Fund (IMF) meeting last week, ECB policymaker and German Bundesbank President Joachim Nagel emphasized the need to implement growth policies already announced by the German government to prevent an economic downturn. emphasized. bad.
“This will be an important contribution to strengthening growth potential,” Nagel said, according to Reuters. “But if we can exceed that in 2025, that would certainly be welcomed from a central bank perspective.” he said.
“We shouldn't be in too much of a hurry to predict interest rates,” Nagel said, adding that the decision in December would be based on a number of indicators, including the results of the U.S. presidential election and inflation statistics. His comments came after several ECB officials backed a deeper-than-usual 50 basis points (bps) rate cut in December.
Daily Digest Market Trends: EUR/USD rises while US dollar declines
- EUR/USD rose in European trading on Monday as the US dollar retreated after hitting a nearly three-month high. The US Dollar Index (DXY), which tracks the value of the US dollar against six major currencies, fell from 104.60. However, the outlook for the dollar remains strong as investors are expected to remain risk-averse with the US presidential election just a week away.
- Central bankers discussed the potential implications of a victory for former US President Donald Trump over current Vice President Kamala Harris in various forums held on the sidelines of last week's IMF meeting. Traders appear to view this scenario as positive for the dollar, as President Trump has vowed to increase tariffs by 10% for all countries except China, which faces even higher tariffs of 60%.
- Apart from the uncertainty surrounding the US presidential election, the dollar will also be influenced by a series of US indicators released this week. Market participants will primarily focus on JOLTS job openings and nonfarm payrolls (NFP) data for clues about job demand, and third-quarter GDP data for the current state of economic health. Probably.
Technical analysis: EUR/USD remains above 1.0750
EUR/USD remains above the upward trend line around 1.0750, which was plotted from the low of around 1.0450 on the October 3, 2023 daily time frame. However, the outlook for major currency pairs remains bleak as they remain below the 200-day exponential moving average (EMA), which hovers around 1.0900.
The downside move in the common currency pair began after the double top formation broke on the daily time frame around the September 11 low of 1.1000, resulting in a bearish reversal.
The 14-day Relative Strength Index (RSI) remains in the range of 20.00-40.00, indicating strong bearish momentum.
On the downside, if the major currency pairs break below 1.0750, further weakness is likely towards round-level support at 1.0700. Meanwhile, the 200-day EMA near 1.0900 and the psychological reading at 1.1000 emerge as major resistance levels.
Euro Frequently Asked Questions
The euro is the currency of the 19 European Union countries that belong to the euro area. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily trading volume of over $2.2 trillion. EUR/USD is the most frequently traded currency pair in the world, accounting for an estimated 30% of all trades, followed by EUR/JPY (4%), EUR/GBP (3%), and EUR/AUD (2%). ) and so on.
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank of the euro area. The ECB sets interest rates and controls monetary policy. The ECB's main task is to maintain price stability, which means controlling inflation or stimulating growth. The main means is to raise or lower interest rates. Relatively high interest rates, or expectations of rising interest rates, usually benefit the euro, and vice versa. The ECB Governing Council decides monetary policy at its eight annual meetings. Decisions will be made by the heads of the euro zone national banks and the six permanent members of the ECB, including ECB President Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric indicator for the euro. If inflation rises more than expected, especially above the ECB's 2% target, the ECB will mandate interest rate hikes to rein in inflation. Relatively high interest rates compared to other countries typically benefit the euro, as it makes the region more attractive to global investors as a place to park their funds.
The data release will gauge the health of the economy and could have an 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 would that attract more foreign investment, but it could also prompt the ECB to raise interest rates, which could directly lead to a stronger euro. Otherwise, if economic indicators are weak, the euro is likely to weaken. Economic data for the euro area's four largest economies (Germany, France, Italy and Spain) is particularly important, as they account for 75% of the euro area economy.
Another important data regarding the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces highly sought-after export goods, the value of its currency increases purely due to the additional demand generated from foreign buyers seeking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
