EUR/USD edges higher as Fed dovish bets keep US Dollar on back foot
- EUR/USD trades close to a one-week high near 1.1730 as the US Dollar underperforms on firm Fed dovish bets.
- Investors await a slew of US labor market-related data this week.
- German inflation grew at a faster-than-expected pace in August.
EUR/USD edges higher, trading near a one-week high around 1.1730 during the European trading session on Monday. The major currency pair gains as the US Dollar (USD) underperforms its peers amid firm expectations that the Federal Reserve (Fed) will resume its monetary easing cycle in the policy meeting in September.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to the August low around 97.60.
According to the CME FedWatch tool, there is an 87.6% chance that the Fed will cut interest rates by 25 basis points (bps) in the policy meeting in September.
Fed dovish expectations have intensified due to growing concerns over the labor market outlook on the back of tariffs imposed by United States (US) President Donald Trump. Also, Federal Open Market Committee (FOMC) members, including Chair Jerome Powell, have expressed concerns over increasing labor market risks.
For fresh cues on the current US labor market status, investors await a string of job-related data, such as JOLTS Job Openings data for July, and ADP Employment Change and the Nonfarm Payrolls (NFP) data for August, which will be released this week.
On Monday, US markets will be closed in observance of Labor Day.
Daily digest market movers: Euro strengthens as German inflation grew at a faster pace in August
- An upbeat performance by the Euro (EUR) has also contributed to an upside move in the EUR/USD pair. The Euro gains as higher-than-expected growth in the preliminary German Harmonized Index of Consumer Prices (HICP) data for August has undermined expectations that the European Central Bank (ECB) will lower interest rates in the near term.
- The data showed on Friday that the HICP grew at an annualized pace of 2.1%, faster than estimates of 2% and the prior reading of 1.8%. On a monthly basis, the inflation data rose by 0.1%, while it was expected to remain flat. However, inflation in other economies of the Eurozone grew at a moderate pace.
- For more cues on inflation in the shared continent, investors will focus on the preliminary Eurozone HICP data for August, which will be released on Tuesday. Economists expect the headline HICP to have grown steadily by 2% on year, with core figures rising moderately by 2.2%.
- In Monday's session, final HCOB Manufacturing Purchasing Managers’ Index (PMI) data for August showed that thefactory activity grew at a faster pace to 50.7, compared to the preliminary figure of 50.5.
- On the political front, French President Emmanuel Macron has announced that he will serve his term until 2027, regardless of a confidence vote on his proposed €44 billion budget package on September 8. "The mandate which has been given to me by the French people, and by no-one else, is a mandate that will be carried out through to the end of its term," Macron said on Friday.
- However, bond yields have soared on the backdrop of French politial risks. 30-year French bond yields have surged to 4.46%, the highest level seen since 2011. A significant jump in borrowing costs for the French economy has refreshed risks seen at times of sub-prime crises among investors. In response, ECB President Christine Lagarde that clarified that the French banking system is in a "better place than the 2008 crisis".
- In the US, investors have become concerned over the credibility of the administration following claims from appeals courts that US President Donald Trump’s tariffs are “illegal”, and he has wrongfully invoked the emergency law to support the same. A panel of judges stated on Friday that Trump has exceeded his authority to fulfill his tariff agenda.
- Additionally, the ongoing legal battle between Fed Governor Lisa Cook and her termination by President Trump over mortgage allegations has also threatened the safe-haven appeal of the US Dollar.
- This week, the US Dollar will also be influenced by the ISM Manufacturing and Services PMI data for August.
Technical Analysis: EUR/USD sees more upside towards 1.1900
EUR/USD trades close to 1.1730, nearing a downward-sloping trendline plotted from July’s high at 1.1830. The near-term trend of the pair is bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 1.1662.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting a sideways trend.
If the pair breaks above the August 22 high near 1.1740, a fresh upside move would become inevitable, targeting the July high at 1.1830 and the round-level resistance of 1.1900.
On the flip side, a downside move below the August 22 low of 1.1583 will expose it to the August 5 low of 1.1528, followed by the August 1 low of 1.1392.
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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