EUR/USD struggles as ECB officials shift focus to revive economic growth
- EUR/USD faces pressure near 1.0600 as ECB policymakers seem more worried about the economic outlook than about controlling inflation.
- ECB’s Panetta emphasized an expansionary monetary policy stance to prevent inflation from remaining well below the bank’s target.
- Deutsche Bank sees the Fed cutting interest rates in December but expects it to be a close call.
EUR/USD continues to face pressure near 1.0600 in Wednesday’s European session, struggling to extend recovery since Friday. The major currency pair lacks adequate strength for further upside as the US Dollar (USD) remains broadly firm on expectations of fewer interest rate cuts from the Federal Reserve (Fed) in its currency policy-easing cycle.
Fed’s data-dependent approach is expected to refrain from cutting interest rates aggressively as market experts project a rebound in the United States (US) inflation and see economic growth accelerating, given that President-elected Donald Trump’s victory in both houses will allow him to implement his economic agenda smoothly.
Trump vowed to raise import tariffs universally by 10% and lower taxes, a move that would not allow the Fed to go for deeper rate cuts. For the December meeting, the Fed will likely cut its borrowing rates by 25 basis points (bps) to the 4.25%-4.50% range, but the decision remains a “close call,” according to analysts at Deutsche Bank.
At the time of writing, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, bounces to near 106.30 from the immediate support of 106.10. The USD Index exhibited sheer volatility on Tuesday due to fresh escalation in the Russia-Ukraine war.
The Greenback gained in the European session on Tuesday as Russian President Vladimir Putin’s clearance to nuclear doctrine revision against Ukraine’s launch of long-range missiles, permitted and provided by the US on President Joe Biden’s approval, strengthened its safe-haven appeal. However, the safe-haven demand lost steam after Russian Foreign Minister Sergei Lavrov said the country would "do everything possible" to avoid the onset of nuclear war, Reuters reported.
Daily digest market movers: EUR/USD struggles to hold recovery
- The recovery move in the EUR/USD pair has stalled due to negative sentiment towards the Eurozone due to lingering geopolitical tensions, weak economic outlook, and German political uncertainty.
- European Central Bank (ECB) officials are more concerned about preserving growth than taming price pressures, as Trump’s tariffs are expected to impact the overall output. ECB policymaker and the Governor of the Bank of Italy Fabio Panetta said in a speech at Milan's Bocconi University on Tuesday, "With inflation close to target and domestic demand stagnant, restrictive monetary conditions are no longer necessary.” Panetta added that price pressures could remain well below the bank’s target if the economy doesn’t recover.
- When asked about his outlook on interest rates, Panetta said that the central bank needs to "focus on the sluggishness of the real economy" and push key borrowing rates into "neutral, or even expansionary, territory", Reuters reported.
- In this year's last monetary policy meeting on December 12, the ECB is expected to cut its Deposit Facility Rate by 25 bps to 3%. This would be the fourth interest rate cut of the year and a third straight in a row.
Technical Analysis: EUR/USD sees more downside below 1.0500
EUR/USD holds the key support of 1.0500 but struggles to extend recovery above 1.0600. The outlook of the major currency pair remains bearish as all short- to long-term daily Exponential Moving Averages (EMAs) are declining.
The 14-day Relative Strength Index (RSI) oscillates in the bearish range of 20.00-40.00, adding to evidence of more weakness in the near term.
Looking down, the pair is expected to find a cushion near the October 2023 low at around 1.0450. On the flip side, the round-level resistance of 1.0600 will be the key barrier 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.