- The Euro loses some buying pressure against the US Dollar.
- Stocks in Europe kicked off the week in the red.
- EUR/USD remains under pressure below 1.0700.
- The USD Index (DXY) holds above the 105.00 hurdle.
- The FOMC gathering will be the salient event this week.
- The US NAHB index will take centre stage later in the session.
The Euro (EUR) alternates ups and downs against the US Dollar (USD) at the beginning of the week, prompting EUR/USD to trade around the 1.0660 region following the opening bell in the European markets on Monday.
The Greenback appears to be under tepid downside pressure, although it manages to keep the trade above the key 105.00 barrier amidst the persistent upside bias in US yields across different timeframes.
With regards to monetary policy, investors continue to assess last week’s dovish hike by the European Central Bank (ECB) and persist in anticipating the possibility of interest-rate reductions by the Federal Reserve (Fed) occurring in the second quarter of 2024.
On another front, EUR net longs extended the downtrend and reached levels last seen in mid-November 2022, according to the latest positioning report by the CFTC for the week ended on September 12. The period under study saw the pair climb to the 1.0750 region and quickly lose ground soon afterwards the ECB event on September 14.
The absence of data releases in the euro docket should shift attention to the US calendar, where the NAHB Housing Price Index and Long-Term TIC Flows are due in the American session.
Daily digest market movers: Euro faces a potential consolidation pre-FOMC
- The EUR has been unable to gather fresh strength against the USD.
- US and German yields have started the week in a positive mood.
- Investors see the Fed keeping rates unchanged this week.
- Fitch agency confirms Germany’s AAA rating with a stable outlook.
- Traders see potential rate cuts by the Fed in H1 2024.
- Expectations of an impasse in the ECB’s hiking cycle appear to be gathering traction.
Technical Analysis: Euro remains offered below the 200-day SMA
EUR/USD looks to extend Friday’s rebound from multi-week lows near 1.0630.
If the EUR/USD breaks below its September 15 low of 1.0631, it may revisit the March 15 low of 1.0516 before reaching the 2023 bottom of 1.0481 seen on January 6.
On the upside, the critical 200-day Simple Moving Average (SMA) is located at 1.0827. Bullish momentum may develop if the pair breaks through this key barrier, leading it to a test of the provisional 55-day SMA at 1.0922 ahead of the August 30 high of 1.0945. This scenario may open the way for a rally towards the psychological level of 1.1000 and the August 10 top of 1.1064. If the pair clears this region, it may relieve some of the bearish pressure and go for the July 27 peak at 1.1149, followed by the 2023 high at 1.1275 from July 18.
As long as the EUR/USD is below the 200-day SMA, the pair might continue to fall.
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.