EUR/USD weakens on firm ECB rate-cut bets, firm US Dollar
- EUR/USD falls sharply to 1.0730 as the US Dollar recovers on the Fed’s hawkish interest-rate guidance.
- Fed’s Collins joins Kashkari to support keeping interest rates steady for a longer period.
- The ECB is expected to deliver three rate cuts this year.
EUR/USD extends its losing spell for the third trading session on Thursday. The major currency pair is on the back foot due to firm speculation that the European Central Bank (ECB) will start lowering its interest rates in June. A sharp decline in the Eurozone inflation has allowed ECB policymakers to consider that prospect.
Most ECB policymakers also expect that the rate-cut cycle will continue beyond June as inflation is on course to return to the desired rate of 2%, and the service inflation doesn’t seem stubborn anymore. Services inflation softened to 3.7% in April after remaining steady at 4.0% for five straight months. Traders are pricing in three rate cuts by the ECB this year.
Contrary to the majority of ECB policymakers, who broadly agree over expectations of reducing interest rates from June, one of its Governing Council members and Governor of Austria's central bank, Robert Holzmann, said in Wednesday's early New York session that he doesn't see a reason to cut key interest rates "too quickly or too strongly," Reuters reported.
Daily digest market movers: EUR/USD drops as US Dollar advances
- EUR/USD extends its correction to 1.0730 as investors turn risk-averse. The market sentiment turns downbeat as US Federal Reserve (Fed) policymakers maintain hawkish guidance on interest rates.
- On Wednesday, Boston Fed Bank President Susan Collins favored for interest rates remaining steady at their current levels until she gets greater confidence that inflation will sustainably return to the desired rate of 2%. Collins added that “A slowdown in activity will be needed to ensure that demand is better aligned with supply for inflation to return durably.” Her comments indicated that the US economic outlook is strong even though interest rates remain higher for a longer period.
- Apart from Collins, Minneapolis Fed Bank President Neel Kashkari also remained lean towards maintaining the current interest rate framework as it is for the entire year. Kashkari remains concerned over stalling progress in inflation declining to 2% amid a strong housing market. When asked about an interest rate cut, Kashkari said weakness in the job market could justify it.
- Amid dismal market sentiment, the appeal for safe-haven assets such as the US Dollar (USD) and bond yields has improved. The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, moves higher to 105.70. 10-year US Treasury yields jump to 4.52%.
- This week, investors look at Fed speakers to project forward moves in the US Dollar due to the absence of top-tier US economic data. However, next week, the major trigger will be producer and consumer inflation data.. Hot inflation numbers would diminish prospects of rate cuts this year.
Technical Analysis: EUR/USD falls to near 1.0730
EUR/USD continues its losing streak for the third trading day in a row. The major currency pair drops to near the 20-day Exponential Moving Average (EMA), which trades around 1.0732, suggesting that the near-term outlook has turned uncertain.
The shared currency pair exhibits a sharp volatility contraction due to a Symmetrical Triangle formation on a daily timeframe. The upward-sloping border of the triangle pattern is plotted from October 3 low at 1.0448 and the downward-sloping border is placed from December 28 high around 1.1140.
The 14-period Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, suggesting indecisiveness among market participants.
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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