EUR/USD rises as sticky Eurozone service inflation keeps ECB’s rate outlook uncertain
- EUR/USD moves higher to 1.0770 as the US Dollar corrects, and the preliminary Eurozone service inflation for June remains sticky.
- The US Dollar declines as Fed’s Powell remains confident that disinflation has resumed.
- Headline Eurozone HICP decelerated expectedly, while the core figure grew steadily year-on-year.
EUR/USD jumps higher to near 1.0770 in Wednesday’s European session after a strong recovery from the round-level support of 1.0700 on Tuesday. The major currency pair extends its recovery as sticky preliminary Eurozone service inflation for June deepens fears of price pressures remaining elevated for a longer period.
Also, other components of the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) report showed that headline inflation decelerated expectedly to 2.5% from May’s reading of 2.6%. In the same period, the core HICP that excludes volatile items rose at a steady pace of 2.9%, and remained higher than estimates of 2.8%. The overall data fails to provide any clarity on where price pressures are heading and kept the European Central Bank’s (ECB) interest-rate outlook uncertain.
However, ECB President Christine Lagarde said at the ECB Forum on Central Banking that inflation is moving in the right direction, and the central bank is very advanced in the disinflation path.
On the interest rate outlook, ECB policymaker and Ireland’s Central Bank Governor Gabriel Makhlouf said he is comfortable with one more rate cut this year but not with market expectations of two. However, he didn’t rule out the possibility.
On the political front, the centralist alliance and the left wing of the European Union’s (EU) second-largest nation withdrew more than 200 candidates from Sunday’s parliamentary elections in an attempt to thwart the far right from gaining an absolute majority.
Daily digest market movers: EUR/USD recovers further as US Dollar falls
- EUR/USD extends its recovery to near 1.0770 as the US Dollar (USD) corrects further. The major currency pair strengthens as the commentary from Federal Reserve (Fed) Chair Jerome Powell at the ECB Forum on Central Banking indicated that the United States (US) economy has resumed its journey on the disinflation path.
- Powell said that recent data indicate the disinflation process has resumed and added that the central bank has made quite a bit of progress in inflation. However, he also said policymakers want to see more good inflation data before cutting interest rates. Powell’s comments were much more in line with expectations and his speech delivered at the June policy meeting.
- Meanwhile, expectations for the Fed to reduce interest rates twice this year and initiate the easing cycle from the September meeting remain firm. Going forward, investors will pay close attention to the US Nonfarm Payrolls (NFP) data for June, which will be published on Friday. The NFP report will indicate the current status of labor demand and wage growth, which will influence market speculation for Fed rate cuts in September.
- The US Dollar will remain uncertain on an event-packed Wednesday as ADP Employment Change, ISM Services Purchasing Managers’ Index (PMI), and the Federal Open Market Committee (FOMC) Minutes for June are scheduled for release.
Technical Analysis: EUR/USD extends recovery to 1.0770
EUR/USD moves higher to near 1.0770 after a decisive break of the Hammer candlestick formation on a daily timeframe. The broader trend remains sideways amid a Symmetrical Triangle formation that exhibits a volatility contraction.
Last week, the major currency pair rebounded after finding strong buying interest near the upward-sloping border of the Symmetrical Triangle formation near 1.0666, which is marked from the 3 October 2023 low at 1.0448. The downward-sloping border of the above-mentioned chart pattern is plotted from 18 July 2023 high at 1.1276. The Symmetrical Triangle formation exhibits a sharp volatility contraction, which indicates low volume and narrow ticks.
The major currency pair remains below the 200-day Exponential Moving Average (EMA) near 1.0790, suggesting that the overall trend is bearish.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, suggesting indecisiveness among market participants.
Euro FAQs
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.