EUR/USD rallies for third day as US debt fears grow ahead of US budget vote
- Moody’s cuts US debt rating, igniting US Dollar selloff and boosting EUR/USD.
- Euro gains despite light data flow as ECB and Fed speeches guide sentiment.
- Traders eye PMIs and jobless claims for fresh cues amid fiscal uncertainty.
EUR/USD extended its rally for the third consecutive day on Wednesday as the US Dollar (USD) continued to face headwinds following the credit downgrade of the United States last Friday. This, along with the vote for Trump's “One Big, Beautiful Bill,” is weighing on traders, as it will increase the national debt, which has been deemed unsustainable by Federal Reserve (Fed) Chair Jerome Powell.
The single currency continues to capitalize on broad US Dollar weakness. Moody’s downward revision to the US government debt rating from AAA to Aa1 on Friday ignited investors' fears over the weekend as the Trump administration budget will be subject to a vote in the US Congress.
The lack of economic data in the Eurozone (EU) and the US keeps traders entertained by speeches from European Central Bank (ECB) and Fed officials. Additionally, US trade deal talks, market sentiment and geopolitics have helped shape the EUR/USD’s path.
Recently, ECB member Jose Luis Escriva commented that the recent appreciation of the Euro had been a surprise, adding that it would be more challenging to predict how tariffs impact inflation.
On Thursday, the economic schedule will feature HCOB Purchasing Managers Index (PMI) data for May in the EU, Germany and France. Across the pond, the US economic docket will feature Initial Jobless Claims data and S&P Global PMIs, which are expected to remain unchanged, according to estimates.
EUR/USD daily market movers: Boosted by USD sell-off as markets punish US policies
- US House Majority Leader Scalise said that the US House of Representatives will vote on Trump’s tax bill late Wednesday. Earlier, US President Donald Trump expressed confidence in the bill's progress in Congress.
- Trump confirmed that truce talks between Russia and Ukraine would commence; he stated that the negotiations would take place in Vatican City.
- A ceasefire between Russia and Ukraine will benefit both countries, easing supply chain disruptions across Europe.
- Interest rate probabilities indicate a 58% chance that the ECB will reduce rates by 25 basis points at the upcoming June 5 meeting. Most ECB officials had expressed favoring a cut at the next meeting, followed by a pause.
- HCOB PMI data in the EU is expected to show a minimal improvement in the Manufacturing PMI, but not in Services and Composite. Despite remaining in expansionary territory, this highlights the ongoing global economic slowdown.
- German PM Merz confirmed a meeting with US President Trump and indicated a proposal to eliminate tariffs mutually. Merz expressed optimism that the US may be open to pursuing a trade agreement with the EU, signaling a potential thaw in transatlantic trade tensions.
EUR/USD technical outlook: Bulls ready to challenge 1.1400
The EUR/USD remains bullishly biased. The pair cleared the 20-day Simple Moving Average (SMA) at 1.1277 and is on its way to hit a two-week high of 1.1362, surpassing the 1.1300 mark.
The Relative Strength Index (RSI) shows that momentum favors buyers.
Hence, the EUR/USD next resistance would be 1.1400. A breach of the latter will expose the April 29 peak at 1.1421, followed by the April 11 high of 1.1473 and 1.15.
On the bearish front, sellers need to pull prices below 1.1300. This would pave the way to test the May 20 daily low of 1.1217, followed by 1.12 and the 50-day SMA at 1.1130.
Euro FAQs
The Euro is the currency for the 19 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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