EUR/USD consolidates as investors look for US PPI

Source Fxstreet
Jun 13, 2024 10:14
  • EUR/USD trades sideways as investors look for fresh cues for Fed rate-cut timing.
  • Fed Chairman Powell said May’s soft CPI report is encouraging but insufficient to build confidence for rate cuts.
  • ECB policymakers see a bumpy path towards the 2% inflation target.

EUR/USD trades in a tight range near the round-level figure of 1.0800 in Thursday’s European session. The major currency pair turns quiet after a bullish Wednesday, when the shared currency pair rallied to 1.0850 from an almost six-week low of 1.0720 after the United States (US) Consumer Price Index (CPI) data for May was cooler than expected, weighing heavily on the US Dollar (USD).

Later on Wednesday, however, EUR/USD pared gains after the Federal Reserve’s (Fed) monetary policy meeting. The Fed kept interest rates unchanged in the range of 5.25%-5.50% for the seventh straight time, as expected, and policymakers projected fewer rate cuts for this year than they expected three months ago.

Specifically, the Fed’s dot plot indicated that policymakers see only one rate cut this year against the three forecasted in March. Fed officials scaled back the number of rate cuts due to the strong labor market and stubbornly higher inflation in the January-March period. Also, they revised the year-end forecast for the core Personal Consumption Expenditures Price Index (PCE), which is the Fed’s preferred inflation measure, higher to 2.8% from March’s estimate of 2.6%.

In the press conference, Fed Chair Jerome Powell said the May’s CPI report is encouraging but also that policymakers want to see more good data to gain confidence before turning to policy normalization. Fed Powell didn’t provide any cues about Fed rate-cut timing and advocated for maintaining the current interest rate framework for a longer period. Powell added that “unexpected easing” in the labor market could force policymakers to address rate cuts early, but also that the employment outlook appears to be firm.

Before the Fed announcements, the CPI report showed that US inflation cooled in May. On the month, headline inflation steadied, and the core reading grew by 0.2%, less the estimated 0.3%. On the year, headline and core CPI decelerated to 3.3% and 3.4%, respectively.

Daily digest market movers: EUR/USD trades sideways amid EU election uncertainty

  • Investors look for fresh cues about the French election outcome. Polls show that Marine Le Pen's far-right National Rally has presented a strong claim for parliamentary elections but it is slightly short of having an absolute majority. Meanwhile, French Finance Minister Bruno Le Maire said that if RN gains power and goes ahead with its program, “a debt crisis is possible in France," Reuters reported.
  • On the monetary policy front, European Central Bank’s (ECB)  policymakers have refused to commit to any specific rate-cut trajectory. Conversely, ECB officials have cautioned about inflation remaining persistent due to stubborn price growth in the services sector, which is mainly driven by wage growth.
  • This week, ECB President Christine Lagarde said in an interview that last week’s rate-cut move doesn’t commit any linear declining path. "There might be periods where we hold rates again,” she added, according to Reuters.
  • In Thursday’s session, the major currency pair will be guided by the US Producer Price Index (PPI) data for May, which will be published at 12:30 GMT. Annual headline PPI is estimated to have accelerated to 2.5% from 2.2% in April, with core reading growing steadily by 2.4%. Stubborn PPI data would diminish market expectations for Fed rate cuts in the September meeting, while soft figures will boost them.

Technical Analysis: EUR/USD hovers around 1.0800

EUR/USD recovers swiftly after sliding to an almost five-week low near 1.0710. The near-term outlook of the major currency pair improves as it breaks above the Symmetrical Triangle chart formation on the daily time frame. The shared currency pair aims for a two-month high near 1.0900.

The long-term outlook of the shared currency pair remains uncertain as it hovers near the 200-day Exponential Moving Average (EMA), which trades around 1.0800.

The 14-period Relative Strength Index (RSI) finds a cushion near 40.00 and is expected to oscillate in the 40.00-60.00 range, which indicates that the current consolidation could persist.

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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