Euro drifts higher above 1.1650 on hawkish ECB stance
- EUR/USD edges higher to around 1.1655 in Thursday’s early European session.
- Hawkish ECB expectations and resilient economic data support the Euro.
- Fed’s preferred inflation gauge showed core PCE rose 3.3% YoY in July.
The EUR/USD pair gains ground to near 1.1655 during the early European trading hours on Thursday. The Euro (EUR) strengthens against the Greenback on the hawkish stance of the European Central Bank (ECB). The US Initial Jobless Claims data is due on Thursday. Markets will shift their attention to the Jackson Hole symposium later on Friday.
The ECB is expected to raise the key interest rates in September after tightening in June to contain price pressures amid ongoing geopolitical tensions. Markets are now pricing in a nearly 96% probability that the ECB will increase the deposit rate to 2.50% at its September policy meeting, according to the ECB Watch tool.
Hawkish rhetoric from ECB policymakers underpins the shared currency. ECB Executive Board member Isabel Schnabel said on Wednesday that borrowing costs will need to rise further as the lengthy conflict in the Middle East and the surprisingly strong Eurozone economy pose upside risks to inflation.
The Eurozone economy has also proved resilient, with data on Friday showing business activity growing at its fastest pace this year.
Data released by the US Commerce Department on Wednesday showed the Fed’s preferred inflation gauge came in line with expectations, with the core PCE inflation holding steady at 3.3% YoY in July.
Meanwhile, the headline PCE rose 3.7% in the 12 months through July, unchanged from June and hotter than the 3.6% estimate. On a monthly basis, the PCE increased 0.2% after falling 0.1% in June, above the consensus of a 0.1% growth. Traders will closely monitor the speech from Fed Chairman Kevin Warsh in Jackson Hole, Wyoming, which could offer some hints about the outlook for US interest rates.
Euro tone stays firm as ECB rhetoric underscores inflation risks
Strategists at Scotiabank note that the policy backdrop remains underpinned by firm ECB rhetoric, with the latest remarks from Executive Board member Isabel Schnabel “maintain[ing] a hawkish bias.” They highlight that Schnabel has pointed to “upside risks to inflation related to both geopolitical developments and resilient euro area growth,” reinforcing market expectations for further tightening and supporting the constructive tone around the Euro despite its recent consolidation.
Technical Analysis: EUR/USD keeps a bullish vibe above the 100-day SMA
In the daily chart, EUR/USD holds above both the 100-day simple moving average (SMA) and the Bollinger middle band, suggesting a constructive bullish bias as buyers defend the recent breakout. Price trades below the upper boundary of the Bollinger band, leaving room for further upside, while the Relative Strength Index (14) at 65.6 stays in bullish territory but shy of overbought, hinting that upside momentum is firm yet not overstretched.
On the topside, immediate resistance is located at the upper boundary of the Bollinger band near 1.1710, where a sustained break would open the way to further gains in the coming sessions. On the downside, initial support is seen at the middle Bollinger Band around 1.1587, followed by the 100-day SMA at 1.1575; a deeper pullback would look toward the lower limit of the Bollinger band near 1.1460 as a more distant structural floor.
(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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