EUR/USD capitalizes on sticky inflation, strong Q1 GDP report
- EUR/USD recovers sharply from below 1.0700 after upbeat Eurozone Q1 GDP, stubborn inflation data.
- Strong Eurozone data has raised concerns over ECB rate cuts from June.
- The US Dollar recovers amid caution ahead of the Fed’s policy decision.
EUR/USD bounces back strongly from below 1.0700 in Tuesday’s European session as the Eurozone preliminary inflation data for April and Gross Domestic Product (GDP) data for the first quarter have beat the consensus. Annually, the Harmonized Index of Consumer Prices (HICP) rose steadily and met estimates while core HCPI, that excludes food and energy prices, softened on a slower pace.
The Eurozone economy expanded at a stronger rate of 0.3% in the first quarter even though the European Central Bank (ECB) is maintaining its Main Refinancing Operations Rate at historic highs of 4.5%.
A sharp recovery in the Euro after the release of the key economic indicators suggests that investors’ confidence about the ECB pivoting to interest rate cuts from June would be significantly impacted. The speculation for the ECB reducing interest rates from June would be impacted in such a time when policymakers were divided over extending the rate-cut campaign to following meetings this year.
Daily digest market movers: EUR/USD rebounds after upbeat Eurozone data
- EUR/USD rebounds sharply from the crucial support of 1.0700 after the Eurostat reported that inflation remained hotter than expected in April and Q1 GDP outperformed estimates. Eurozone’s headline inflation rose in line with the consensus and the prior reading of 2.4%. The annual core inflation, which strips off volatile food and energy prices, grew at a higher pace of 2.7% from the estimates of 2.6% but decelerated from the prior reading of 2.9%.
- Monthly headline and core inflation rose by 0.6% and 0.7%, respectively. The Eurozone economy expanded at a strong rate of 0.3% in Q1, beating expectations of 0.1% and a stagnant performance in the last quarter of 2023. Annually, the Q1 GDP growth rate was double the expectations of 0.2%.
- Stronger-than-expected preliminary inflation for April, combined with robust Q1 GDP growth, is not expected to significantly impact expectations of rate cuts by the European Central Bank, which financial markets are expected to start in June.
- On the other side of the Atlantic, The US Dollar rebounds sharply as the market sentiment remains risk-off ahead of the Federal Reserve’s monetary policy decision, which will be announced on Wednesday. The US Dollar Index (DXY) recovers from 105.50 but remains inside two-week’s trading range of 105.40-106.50. The Fed is expected to keep interest rates unchanged in the range of 5.25%-5.50% for the sixth time in a row as price pressures in the United States remain stubbornly higher due to strong wage growth.
- The Fed will likely endorse keeping interest rates on hold at their current level for longer until it gets greater confidence that inflation will sustainably return to the desired rate of 2% target. Investors would look for whether the Fed will remain committed to its three rate-cut projections for this year provided in March’s dot plot.
- Apart from Wednesday’s Fed policy decision, investors will also focus on the US ADP Employment Change and the ISM Manufacturing Purchasing Managers Index (PMI) report for April.
Technical Analysis: EUR/USD finds strong buying interest near 1.0700
EUR/USD bounces back strongly from above the round-level support of 1.0700. The major currency pair attempts to break above the 20-day Exponential Moving Average (EMA), which trades around 1.0725.
The panoramic view of the EUR/USD pair indicates a sharp volatility contraction due to a Symmetrical Triangle formation on a daily timeframe. The upward-sloping border of the triangle pattern is plotted from October 3 low at 1.0448 and the downward-sloping border is placed from December 28 high around 1.1140.
The 14-period Relative Strength Index (RSI) shifts into 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.
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