Euro flatlines above 1.1600 despite ECB hawkish hike, traders brace for US CPI data
- EUR/USD steadies near 1.1610 in Friday’s early Asian session.
- ECB raised its key deposit rate by 25 bps to 2.50% in a move widely expected by traders.
- Markets price in a 70% chance of a September Fed rate hike.
The EUR/USD pair holds steady around 1.1610 during the early Asian session on Friday. Traders continue to assess a hawkish hike from the European Central Bank (ECB). However, markets might turn cautious later in the day ahead of the key US Consumer Price Index (CPI) inflation data for more clues on the US interest rate path.
The ECB raised the interest rate on the deposit facility to 2.50% at its September policy meeting on Thursday, as widely expected. It was the ECB’s second hike this year, after policymakers raised borrowing costs in June for the first time since 2023.
ECB President Christine Lagarde warned that the conflict in the Middle East and recent developments in Russia’s war on Ukraine will keep headline inflation “well above target” the bank’s 2% target for an extended period.
Analysts said Lagarde struck a hawkish tone, signaling that further rate increases were possible. This, in turn, could provide some support to the shared currency in the near term. “The communications from the ECB can be read as at least having a hawkish tilt,” said Roman Ziruk, an FX strategist at Ebury.
Across the pond, hotter US Producer Price Index (PPI) inflation data increased bets for a US Federal Reserve (Fed) rate hike next week. Markets are now pricing in nearly 70% odds of an increase in US interest rates next week, up from 62% before the data, according to the CME FedWatch Tool.
Euro steadies as Scotiabank looks for a more forceful ECB tightening signal
Analysts at Scotiabank expect the ECB to strike a firmer tone at the upcoming meeting, arguing that “we expect a hawkish message, given the latest recovery in oil prices,” and that officials are likely to deliver “a forceful endorsement in favor of further near-term tightening as policymakers remain intent on containing the risk of broadening price pressures.”
Technical Analysis: EUR/USD
In the daily chart, EUR/USD holds a modest bullish bias as spot remains above the 100-day simple moving average (SMA), while price is also supported by the lower Bollinger Band near 1.1561. The Relative Strength Index (RSI) at 53.9 leans slightly positive without signaling overbought conditions, suggesting scope for further upside as long as buyers defend the underlying moving average cluster.
On the topside, immediate resistance emerges at the Bollinger middle band, the 20-day SMA, around 1.1628, followed by the upper Bollinger Band near 1.1695. On the downside, initial support is aligned with the 100-day SMA and the lower Bollinger Band in the 1.1560 area, with a sustained break below that zone needed to undermine the current constructive tone and open the door to a deeper correction.
(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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