EUR/USD rises as US Dollar drops at the start of Fed policy decision week
- EUR/USD moves higher to near 1.1325 as the US Dollar faces selling pressure ahead of the Fed’s monetary policy meeting on May 6-7.
- US President Trump said he is confident about closing trade deals this week.
- The ECB is expected to continue lowering interest rates despite the increase in Eurozone inflation in April.
EUR/USD trades slightly higher to near 1.1325 during the European trading hours on Monday, further gaining ground after touching a three-week low of 1.1265 late last week. The major currency pair rises as the US Dollar (USD) on persistent uncertainty over United States (US)-China trade relations and as investors turn cautious ahead of the Federal Reserve’s (Fed) monetary policy announcement on Wednesday.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to near 99.80 but is trading inside Friday’s range.
Over the weekend, US President Donald Trump expressed confidence while speaking with reporters that bilateral trade deals with some of his trading partners could be announced this week. However, he confirmed not having any dialogue with Chinese leader Xi Jinping this week, but didn’t deny any ongoing trade discussions between officials from both nations.
While the announcement of bilateral trade deals by Washington would indicate that fears of tariffs proposed by US President Trump have peaked now, the long-lasting standoff between the world’s two largest powerhouses will continue to keep investors on their toes.
This week, the major trigger for the US Dollar will be the Federal Reserve’s (Fed) monetary policy meeting, which will be announced on Wednesday. The Fed is widely anticipated to leave interest rates unchanged in the range of 4.25%-4.50%. Therefore, investors will pay close attention to the monetary policy statement and Fed Chair Jerome Powell’s press conference to get cues about the interest rate outlook.
Better-than-expected Nonfarm Payrolls (NFP) data for April and elevated consumer inflation expectations in the face of Donald Trump’s tariff policy will be a limiting factor for the Fed to reduce interest rates.
Daily digest market movers: EUR/USD gains as USD faces pressure
- EUR/USD gains at the expense of the US Dollar. The Euro (EUR) trades broadly flat while traders are increasingly confident that the European Central Bank (ECB) will reduce interest rates again in the June policy meeting despite hotter-than-expected Eurozone Harmonized Index of Consumer Prices (HICP) data for April.
- The data showed on Friday that the core HICP – which excludes volatile components like food, energy, alcohol, and tobacco – grew at a faster pace of 2.7% compared to estimates of 2.5% and the March reading of 2.4%. In the same period, the headline HICP rose steadily by 2.2% on year, faster than estimates of 2.1%.
- Traders continue to bet supporting more interest rate cuts from the ECB as they are more concerned about the Eurozone economic outlook due to the fallout of Donald Trump’s protectionist policy than the slight increase in inflationary pressures.
- On Friday, ECB Vice President Luis de Guindos expressed confidence in an interview with Austria’s Die Presse newspaper that the central bank could continue reducing interest rates, Reuters reported. "It depends on how inflation develops. But we can be optimistic here," de Guindos said, after being asked how long the ECB will continue reducing interest rates.
- In Monday’s session, the EUR/USD pair will be influenced by the US final S&P Global and ISM Services Purchasing Managers’ Index (PMI) data for April. The ISM Services PMI is expected to come in lower at 50.6 from 50.8 in March, signaling that the services sector grew at a moderate pace.
Technical Analysis: EUR/USD recovers above 1.1300
EUR/USD holds recovery above the key level of 1.1300 on Monday from its three-week low of 1.1265 posted on Thursday. The major currency pair rebounded after attracting bids near the 20-day Exponential Moving Average (EMA) around 1.1260.
The 14-day Relative Strength Index (RSI) falls inside the 40.00-60.00 range, indicating that the bullish momentum has concluded for now. However, the upside bias still prevails.
Looking up, the psychological level of 1.1500 will be the major resistance for the pair. Conversely, the 25 September high of 1.1214 will be a key support for the Euro bulls.
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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