- EUR/USD fell to around 1.0720 as the US Dollar recovered despite weak US manufacturing PMI data.
- The euro remains on edge ahead of the eurozone's preliminary June HICP report.
- Investors are awaiting a speech from Fed Chairman Powell for new guidance on interest rates.
EUR/USD fell but held the key support at 1.0700 in Tuesday's European session, down from a more than two-week high of around 1.0770 hit on Monday. The major currency pair is expected to remain volatile as investors' attention shifts to preliminary Eurozone Consumer Price Index (HICP) data for June, due to be released at 9am GMT.
The inflation report is expected to show that the HICP slowed to 2.5% year-on-year from 2.6% in May. Over the same period, the core HICP, which excludes more volatile components such as food, energy, alcohol and tobacco, is estimated to have slowed to 2.8% from the previously announced 2.9%. A scenario in which price pressures fall as expected or faster would raise expectations of a subsequent interest rate cut by the European Central Bank (ECB).
The preliminary German HICP report for June, released on Monday, showed that price pressures had weakened more than expected, opening up space for the ECB to deliver successive rate cuts. But policymakers have refrained from charting a specific path for rate cuts, worried that an aggressive policy easing campaign could reinvigorate price pressures.
And European Central Bank President Christine Lagarde said at the ECB's Central Bank Forum on Monday that “it will take time to gather sufficient data to be confident that the risks of above-target inflation have passed,” Reuters reported Lagarde as adding that “the strength of the labour market allows us to take our time to gather new information.”
Besides eurozone inflation data, the second round of French runoff elections scheduled for July 7 will also keep the euro on edge. Exit polls from the first round of the French parliamentary elections show Marine Le Pen's far-right National Rally party in a comfortable position, but by a smaller margin than expected.
Daily Digest Market Trends: EUR/USD Remains Uncertain as US Dollar Rebounds
- EUR/USD weakened slightly as the US Dollar (USD) rebounded despite the US ISM Manufacturing Purchasing Managers' Index (PMI) report for June reporting an unexpected decline in factory activity. The data also showed that manufacturing inflationary pressures, as measured by the ISM Manufacturing Payments Price Index, increased at a much slower pace than expected.
- The US Dollar Index (DXY), which measures the value of the greenback against six major currencies, has rallied sharply to the 106.00 region. Meanwhile, investors are looking for more clues about when the Federal Reserve will start cutting interest rates this year. Investors will be focusing on a speech by Fed Chairman Jerome Powell, scheduled for 13:30 GMT.
- Financial markets currently expect the Fed to start cutting interest rates when it meets in September, with Fed policymakers expected to cut rates two times this year, compared with just one in the latest dot plot.
- In addition to Fed Chairman Powell's speech, investors will be keeping an eye on the JOLTS jobs data for May, due to be released at 14:00 GMT. Economists expect employers to post 7.9 million job openings, slightly down from April's 8.06 million.
Technical reasons why: EUR/USD holds key support at 1.0700
EUR/USD failed to rise above the 20-day Exponential Moving Average (EMA) trading near 1.0740 and hence fell to near 1.0720. The major pair rebounded last week after spotting strong buying interest near the upward boundary of a Symmetrical Triangle formation at the daily bar near 1.0666, marked from the October 3, 2023 low of 1.0448. The downward boundary of the above chart pattern is plotted from the July 18, 2023 high of 1.1276. The Symmetrical Triangle formation indicates a sharp contraction in volatility, which indicates low trading volumes and narrow ticks.
The major currency pair remains below its 200-day exponential moving average (EMA) near 1.0790, suggesting that the overall trend is bearish.
The 14-period Relative Strength Index (RSI) is fluctuating within the range of 40.00-60.00, indicating indecisiveness among market participants.
Frequently asked questions about the Euro
The Euro is the currency of 20 European Union countries that belong to the Eurozone. 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 volume of over $2.2 trillion. EUR/USD is the most traded currency pair in the world, accounting for approximately 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The ECB's main mission is to maintain price stability, which means either keeping inflation down or stimulating growth. The ECB's main tool is to raise or lower interest rates. Relatively higher interest rates, or the expectation of rising interest rates, typically benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight meetings per year. Decisions are made by the heads of the eurozone national banks and the six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric input for the euro. If inflation rises more than expected, especially if it exceeds the ECB's target of 2%, the ECB will be forced to raise interest rates to keep inflation in check. Relatively high interest rates compared to other countries are usually favorable for the euro, as they make the eurozone a more attractive place for global investors to park their funds.
Data released measures the health of the economy and can affect 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, it can also trigger the ECB to raise interest rates, which directly strengthens the euro. On the other hand, weak economic data can cause the euro to weaken. Economic data from the eurozone's four largest economies (Germany, France, Italy, and Spain) is particularly important as they account for 75% of the eurozone's economy.
Another important piece of data about 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 exports that are in high demand, its currency will only increase in value due to the additional demand it generates from foreign buyers looking to purchase these goods. So a positive trade balance makes a currency stronger, and a negative one makes it stronger.
