Next to touch, 1.1275 appears as a bullish target

VaselineAugust 23, 2024

0 4 minutes read

Next to touch, 1.1275 appears as a bullish target

Growing bets for a rate cut by the Fed in September weighed on the US dollar.
Powell cleared the way for an interest rate cut in September.
EUR/USD made a new 2024 high near 1.1200 and is holding 1.1275.

Another solid weekly performance saw EUR/USD post a fourth consecutive week of gains, including a new 2024 peak in the 1.1180–1.1185 band. The pair’s strong move higher came in response to the increased downtrend hitting the US dollar (USD).

Powell cemented the case for a rate cut next month

It was a positive week for EUR/USD throughout as market participants continued to punish the greenback on the basis that the Federal Reserve (Fed) could start cutting interest rates as soon as September.

That view was addressed by some Fed officials as well as the FOMC minutes earlier in the week, though the final word came from Chairman Jerome Powell on Friday. Indeed, in his much-anticipated speech at the Jackson Hole Symposium, Powell signaled that the time had come for a change in the stance of monetary policy, adding that he was now more confident that US inflation was moving towards the bank’s target on a path durable.

The question of the potential size of the rate cut appears to be leaning towards a quarter-point cut, as fears of a US recession quickly faded in response to the release of relatively firm data of late.

The ECB is also expected to cut rates in September

Despite radio silence from the European Central Bank (ECB), investors continue to pencil in two more interest rate cuts by the central bank for the rest of the year, most likely in September and December, which should take the rate to deposit facility. 3.25% until the end of the year.

The logic behind further easing by the ECB can be found in worsening business and economic activity conditions in Germany and across the euro bloc. While a recession on the old continent may be overstated, the likelihood of a period of economic slowdown seems more appropriate.

The same cannot be said for inflation in the region, which remains stubbornly high, especially in services. However, according to the ECB’s latest survey, wage growth in the euro area slowed in the last quarter, strengthening the case for another interest rate cut in the next few months and allaying policymakers’ concerns that rising labor costs would continue lead to increased inflation.

In addition, growth in negotiated wages slowed to 3.55 percent in the second quarter, down from 4.74 percent in the previous three months, largely due to a sharp slowdown in Germany, the bloc’s largest economy.

Overall, while the Fed-ECB policy divergence appears to be narrowing over the next few months, attention is expected to focus on the real economy, where the US has an advantage over its European peer, thus keeping the Greenback’s downside somewhat contained over the long term. long.

What’s next for EUR/USD?

Next, Germany is expected to take center stage next week with the release of IFO’s business climate (26 August), final Q2 GDP growth rate (27 August), GfK consumer confidence (28 August), the advanced rate of inflation for the current month (August 29), retail sales and the labor market report (August 30). In addition, the preliminary rate of inflation in the wider euro area is also expected on August 30.

EUR/USD Technical Outlook

Technically, EUR/USD is positioned to continue its uptrend. On the weekly chart, the spot has left behind the key 200-week SMA at 1.1063, which for now bodes well for the continuation of the ongoing uptrend.

On the daily chart, the technical indicators remain in the overbought region, while the momentum indicates that the current uptrend remains strong. Both the interim 55-day and 100-day SMAs continue to point north at 1.0857 and 1.0820, respectively. Meanwhile, the Spot is holding its business above the critical 200-day SMA at 1.0847, thus maintaining the near-term constructive trend. Meanwhile, further advances are likely, with the YTD high at 1.1194 (August 23) emerging as the immediate upside barrier. A move beyond this level could lead to an advance towards the 1.1200 threshold ahead of the 2023 peak of 1.1275 (July 18).

For a pullback, immediate support is at 1.0881 (weekly low of August 8), followed by the 200-day SMA and August 1.0777 (August 1).

Economic indicator

Consumer Price Index (annual)

The consumer price index (CPI), published monthly by the German statistics office Destatis, measures the average price change for all goods and services purchased by households for consumption purposes. The CPI is the main indicator for measuring inflation and changes in buying trends. The YoY reading compares prices from the reference month to one year earlier. Generally, a high reading is bullish for the euro (EUR), while a low reading is bearish.

ECB FAQs

The European Central Bank (ECB) in Frankfurt, Germany is the reserve bank for the euro area. The ECB sets interest rates and manages monetary policy for the region. The ECB’s main mandate is to maintain price stability, which means keeping inflation at around 2%. Its main tool to achieve this is by raising or lowering interest rates. Relatively high interest rates will usually lead to a stronger euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of national banks in the euro area and six permanent members, including ECB President Christine Lagarde.

In extreme situations, the European Central Bank can implement a policy tool called Quantitative Easing. QE is the process by which the ECB prints euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually leads to a weaker euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis of 2009-11, in 2015 when inflation remained stubbornly low, and during the covid pandemic.

Quantitative tightening (QT) is the inverse of QE. It is undertaken after QE when an economic recovery is underway and inflation begins to rise. While in QE the European Central Bank (ECB) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds and stops reinvesting the maturing principal in the bonds it already owns . It is usually positive (or bullish) for the euro.

VaselineAugust 23, 2024

0 4 minutes read