- Euro extends the decline to the sub-1.0800 region vs. the US Dollar.
- Stocks in Europe trade on the positive foot early on Friday.
- EUR/USD slips back to the 1.0770 zone amidst Dollar gains.
- The USD Index (DXY) advances north of the 104.00 hurdle.
- Business Climate in Germany surprised to the downside in August.
- All the attention will be on Chair Jerome Powell’s speech.
- ECB’s President Christine Lagarde will also speak later on Friday.
- Final Consumer Sentiment is due next in the US calendar.
The Euro (EUR) adds to the pessimism seen in the second half of the week vs. the US Dollar (USD) and forces EUR/USD to retreat further and print new ten-week lows in the 1.0780/75 band on Wednesday.
On the flip side, the Greenback keeps the march north unabated and surpasses the key 104.00 hurdle when measured by the USD Index (DXY), always helped by rising US yields across the curve as well as persistent cautiousness ahead of the Jackson Hole event.
Regarding monetary policy, there is currently a renewed debate surrounding the Federal Reserve’s dedication to maintaining a more stringent approach over an extended period of time. This heightened attention stems from the remarkable resilience of the US economy, despite slight relaxation in the labour market and lower inflation figures observed in recent months.
On this, Philly Fed Patrick Harker suggested on Thursday that the Fed is still operating within restrictive bounds, while he argued that there could be potential interest rate reductions in the upcoming year if inflation subsides. Meanwhile, Susan Collins from the Boston Fed did not dismiss the possibility of further interest rate hikes.
Meanwhile, within the European Central Bank (ECB), internal divisions among its Council members have emerged regarding the possibility of prolonging tightening measures beyond the summer season. These disagreements are fueling a renewed perception of fragility, which is exerting a detrimental influence on the Euro.
Still around the ECB, Board member Mario Centeno hinted on Thursday at a prudent strategy for the ECB’s September meeting.
Data-wise, in the euro region, Germany’s Business Climate tracked by the IFO Institute receded to 85.7 for the current month. Earlier in the session, final GDP figures saw the German economy contract at an annualized 0.2% during the April-June period and come in flat vs. the previous quarter.
In the US, the final Michigan Consumer Sentiment will be the sole release later in the NA session.
Daily digest market movers: Euro remains offered prior to Powell, Lagarde
- The EUR weakens to multi-week lows vs. USD.
- Rising prudence ahead of Jackson Hole weighs on the risk complex.
- US yields appear to gather some traction across the curve.
- Markets’ attention remains on the Jackson Hole gathering.
- Fed’s tighter-for-longer narrative keeps running in the background.
- Chair Powell’s speech is expected to fall in line with his latest message.
- The Fed is likely to maintain rates unchanged until Q1 2024.
- ECB’s Lagarde could unveil further details regarding the September meeting.
Technical Analysis: Euro’s outlook should shift to negative below the 200-day SMA
The selling pressure around EUR/USD gains extra pace and relegates the pair to trade in multi-week lows around 1.0770. The recent breakdown of the critical 200-day SMA does not bode well for bulls’ aspirations.
Further decline could motivate EUR/USD to revisit the August low around 1.0766 (August 25) ahead of the May low of 1.0635 (May 31) and the March low of 1.0516 (March 15). The loss of this level could prompt a test of the 2023 low at 1.0481 (January 6) to re-emerge on the horizon.
Occasional bouts of strength, in the meantime, should meet provisional resistance at the 55-day SMA at 1.0964 prior to the psychological 1.1000 barrier and the August high at 1.1064 (August 10). Once the latter is cleared, spot could challenge the weekly top at 1.1149 (July 27). If the pair surpasses this region, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 (July 18). Further up comes the 2022 high at 1.1495 (February 10), which is closely followed by the round level of 1.1500.
Furthermore, sustained losses are likely in EUR/USD once the 200-day SMA is cleared in a convincing fashion.
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.