Euro stays defensive vs USD amid geopolitical risks as traders await Lagarde's speech
- EUR/USD ticks lower as concerns about a possible Russian escalation against Europe weigh on the Euro.
- Fed hike bets and escalating Middle East tensions support the USD, further exerting pressure on the pair.
- The downside seems limited ahead of ECB President Christine Lagarde and the crucial Trump-Xi meeting.
The EUR/USD pair struggles to capitalize on Friday's modest bounce from the vicinity of mid-1.1400s, or the lowest level since late July, and edges lower at the start of a new week. Spot prices currently trade around the 1.1475 region and seem vulnerable amid rising geopolitical tensions.
Officials in Europe warned about Russia's drone, missile, sabotage and cyber operations against NATO countries supporting Ukraine in the coming months. The latest warning came from French President Emmanuel Macron on Friday, saying that the Russian hybrid threat facing Europe and France had intensified. This is seen as undermining the Euro, while escalating tensions in the Middle East act as a tailwind for the US Dollar (USD).
In the latest developments, Iran-backed Houthis in Yemen said that they attacked sensitive sites in the Saudi capital of Riyadh on Saturday with missiles and drones. Furthermore, Iran laid out seven conditions for restarting talks with the US. This keeps the geopolitical risk premium in play, which, along with the US Federal Reserve's (Fed) hawkish stance, lends some support to the safe-haven Greenback and weighs on the EUR/USD pair.
In fact, the US central bank raised borrowing costs for the first time in over three years at the end of the September meeting last Wednesday. Moreover, the so-called dot plot revealed that officials expect one more rate hike this year. The European Central Bank (ECB), on the other hand, warned that price pressures could last longer than it had anticipated. This lifted bets on further policy tightening in October, which supports the EUR/USD pair.
ECB President Christine Lagarde is set to speak later this Monday and should provide some impetus to the shared currency. The focus, however, will remain on the incoming geopolitical headlines, which, along with a crucial meeting between US President Donald Trump and his Chinese counterpart Xi Jinping on Thursday, will influence risk sentiment. This, in turn, will drive the USD and determine the EUR/USD pair's near-term trajectory.
EUR/USD daily chart
Technical Analysis
The EUR/USD pair maintains a bearish near-term bias under the 100-day Simple Moving Average (SMA) at 1.1546 and the 61.8% retracement at 1.1486. Immediate support aligns with the 78.6% Fibo. retracement at 1.1426, ahead of a more substantial floor at 1.1350.
On the topside, bulls would first need to reclaim the 61.8% retracement at 1.1486 to ease the current pressure, with subsequent resistance levels emerging at the 50.0% retracement around 1.1529 and the 100-day SMA at 1.1546. A sustained break above these barriers would be required to argue for a more durable recovery toward 1.1571 and 1.1623.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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