EUR/USD consolidates around 1.0850 ahead of FOMC minutes

Source Fxstreet
May 22, 2024 09:03
  • EUR/USD treads cautiously as investors shift focus to the FOMC minutes.
  • ECB policymakers are divided about continuing the dovish trend beyond the June meeting.
  • Fed officials want to see inflation easing for months before lowering interest rates.

EUR/USD is stuck in a tight range around 1.0850 in Wednesday’s European session. The major currency pair is expected to remain sideways ahead of the release of the Federal Open Market Committee (FOMC) minutes later in the day and the Eurozone/United States preliminary Purchasing Managers Index (PMI) data for May, which will be published on Thursday. The PMI data will provide cues about trends in demand, inflation and employment.

The Euro remains underpinned against the US Dollar as market participants doubt whether the European Central Bank (ECB) will extend the interest rate cuts beyond June. Few ECB policymakers, such as Bundesbank President Joachim Nagel, President of De Nederlandsche Bank Klaas Knot, Belgium Bank Governor Pierre Wunsch and Bank of Latvia Governor Martins Kazaks, believe that a rate-cut move in June is on the cards, but a follow-up move could be premature.

On the inflation outlook, ECB’s Nagel said, "There may well be months when inflation picks up a little, as some prices tend to fluctuate – energy prices in particular". Nagel added, "On the whole, I expect inflation to carry on declining towards our 2% target and to reach it in 2025."

Daily digest market movers: EUR/USD juggles in a tight range amid steady US Dollar 

  • EUR/USD trades in a tight range at around 1.0850 as investors look for fresh clues about the United States interest-rate path. The uncertainty over rate-cut timing has deepened as Federal Reserve (Fed) officials support keeping interest rates at their current levels until they get evidence that inflation will sustainably return to the desired rate of 2%.
  • The expected decline in the annual United States Consumer Price Index (CPI) data for April failed to build confidence among Fed policymakers that the progress in the disinflation process will continue. Given the strength of the US economy, officials are worried that the slowdown in price pressures will not last longer.
  • On Tuesday, Cleveland Fed Bank President Loretta Mester said that she wants to see good inflation data for months in order to become comfortable with supporting a move to policy normalization. When asked about a concrete timeframe for rate cuts, Atlanta Federal Reserve President Raphael Bostic said he doesn’t expect them before the fourth quarter of this year. On the inflation outlook, Bostic commented that business owners have experienced a decline in pricing power but are confident about economic prospects.
  • Going forward, investors will focus on the FOMC minutes of the May meeting, which will be published in Wednesday’s New York session. The impact of the FOMC minutes is expected to be light as Fed’s decision-making on interest rates was based on stubborn inflation data recorded in the January-March period.

Technical Analysis: EUR/USD trades inside Tuesday’s trading range

EUR/USD trades in a narrow range around 1.0850 as investors await the FOMC minutes release for fresh guidance. The major currency pair hovers inside Tuesday’s trading range, suggesting a sharp volatility contraction. The shared currency pair is broadly firm as it holds the Symmetrical Triangle breakout that formed on a daily timeframe. Also, a bullish crossover of the 20-day and 50-day Exponential Moving Averages (EMAs) around 1.0780 has improved the near-term outlook of the shared currency pair.

The 14-period Relative Strength Index (RSI) has shifted comfortably into the bullish range of 60.00-80.00, suggesting that the momentum has leaned toward the upside.

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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