- The Euro’s rebound looks capped near 1.0860 against the US Dollar.
- Stocks in Europe maintain the bullish tone unchanged so far.
- The USD Index (DXY) keeps the familiar range near 103.50.
- No surprises from the final Manufacturing PMIs in Germany, Eurozone.
- US Nonfarm Payrolls, ISM manufacturing are next of note.
The Euro (EUR) manages to regain some composure against the US Dollar (USD) following an earlier drop to 1.0830, helping EUR/USD to retake the 1.0850/60 band at the end of the week.
The modest advance in the pair comes in line with the slightly offered stance in the Greenback. The USD Index (DXY), which tracks the US Dollar against a basket of six other major currencies, gyrates around the 103.50 zone amidst the lack of a clear direction in US yields across different maturities.
In the meantime, investors continue to reprice a pause by the Federal Reserve in its tightening campaign. The upcoming release of the Nonfarm Payrolls for August should lend further insight into this view.
Back to the European Central Bank (ECB), there is a great deal of uncertainty regarding the potential steps beyond the summer amidst a pretty divided Governing Council and rising speculation that a stagflation scenario could be brewing in the region.
Data-wise, final Manufacturing PMIs in Germany and the broader euro area came in at 39.1 and 43.5, respectively, for the month of August. The readings, which signal a persisting contraction in factory activity, were broadly in line with the preliminary estimates.
Later in the American session, Nonfarm Payrolls, Unemployment Rate and the ISM Manufacturing PMI will take the centre stage. Construction Spending and the final S&P Global Manufacturing PMI data for the US will also be published.
Daily digest market movers: Euro looks cautious ahead of US NFP
- The Euro gathers some strength against the USD.
- Final PMIs in Europe broadly matched the preliminary prints.
- China’s Caixin Manufacturing PMI returned to expansionary territory.
- The PBoC reduced the FX RRR to 4% to support the Chinese yuan.
- Investors’ focus shifts to NFP, ISM Manufacturing.
- Investors see the Fed on hold for the remainder of the year.
Technical Analysis: Euro appears supported by the 200-day SMA
EUR/USD regains some upside traction following Thursday’s strong pullback and three-day lows near 1.0830.
In case bulls regain the upper hand and EUR/USD surpasses Wednesday’s weekly top of 1.0945, the pair is expected to meet the provisional 55-day Simple Moving Average (SMA) at 1.0965 prior to the psychological 1.1000 barrier and the August 10 monthly top at 1.1064. Once the latter is cleared, spot could challenge July’s 27 peak at 1.1149. If the pair surpasses this region, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 seen on July 18. Further up comes the 2022 high at 1.1495, which is closely followed by the round level of 1.1500.
The resumption of the downward bias could motivate the pair to initially test the key 200-day SMA at 1.0815 ahead of the August 25 low of 1.0765. The breach of the latter exposes the May 31 low of 1.0635 prior to the March 15 low of 1.0516 and the 2023 low at 1.0481 recorded on January 6.
Sustained losses are likely in EUR/USD once the 200-day SMA is breached in a convincing fashion.
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.