EUR/USD holds below 1.1100 as Eurozone and US inflation looms

VaselineAugust 30, 2024

0 5 minutes read

EUR/USD holds below 1.1100 as Eurozone and US inflation looms

EUR/USD is trading sideways below 1.1100 as investors await key inflation data from the Eurozone as well as the US.
Weak inflation in Germany boosted hopes of another ECB interest rate cut in September.
The upwardly revised Q2 US GDP slightly reduces the chances of the Fed opting for a bigger rate cut.

EUR/USD is trading in a very tight range below 1.1100 in the European session on Friday, with investors focusing on the Eurozone Rapidly Harmonized Index of Consumer Prices (IACP) for August and the Personal Consumption Expenditure Price Index ( PCE) from the United States (US) for July, which will be published at 09:00 GMT and 12:30 GMT respectively.

The Eurozone HICP report is expected to show headline inflation fell sharply to 2.2% from 2.6% in July due to lower energy prices. Over the same period, the core HICP – which excludes volatile components such as food, energy, alcohol and tobacco – is estimated to have increased by 2.8%, slower than the previous release of 2.9%.

Preliminary inflation data is expected to influence market speculation for the European Central Bank’s (ECB) interest rate cuts in September and, more broadly, the path of policy easing for the rest of the year.

Financial market participants already seem confident that the ECB will cut its key lending rates again in September. The ECB switched to policy normalization in June but left interest rates unchanged in August. Market expectations for a September interest rate cut by the ECB rose sharply after data on Thursday showed price pressures in the eurozone’s largest nation, Germany, returned to 2% for the first time in more than three years. The economy is also exposed to a technical recession, as it contracted by 0.1% in the second quarter of this year, and its economic outlook is vulnerable. Other eurozone economies, such as France and Spain, also saw a significant drop in inflation in August.

“Easing inflationary pressure combined with waning growth momentum provides an almost perfect macro backdrop for a further rate cut,” Carsten Brzeski, global head of macro at ING, said in a note on Thursday.

The ECB is also expected to deliver a further interest rate cut sometime in the last quarter of this year.

Daily Market Reasons: EUR/USD trades sideways ahead of key inflation data

EUR/USD trades cautiously as the US Dollar (USD) strengthens ahead of US PCE inflation data for July. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is trading slightly below a new weekly high of 101.58.
Investors are looking to US inflation data for fresh clues about the Federal Reserve’s (Fed) likely monetary policy action at its September meeting. The PCE report is expected to show that year-on-year core inflation rose at a slightly faster pace to 2.7% from 2.6% in June, with the monthly figures up a steady 0.2% .
Financial markets currently appear to be confident that the Fed will begin cutting interest rates in September. Still, traders remain divided on the potential size by which the Fed will pivot toward policy normalization.
According to the CME FedWatch tool, data on 30-day Federal Funds Futures prices show that the probability of a 50 basis point (bps) interest rate cut in September is 33%, while the rest favor a 25bps cut.
The likelihood of a bigger rate cut fell slightly after the US Bureau of Economic Analysis (BEA) reported that the pace at which the economy grew in the second quarter was faster than previously estimated. The agency reported that the economy grew at a robust pace of 3 percent on an annual basis, versus preliminary estimates of 2.8 percent.

Technical analysis: EUR/USD is consolidating below 1.1100

EUR/USD is trading in Thursday’s trading range after holding below the crucial 1.1100 resistance. The short-term outlook for the major currency pair is still firm as all short-term and long-term exponential moving averages (EMAs) are trending higher. The main currency pair also holds the breakout of the Rising Channel formation on a daily time frame.

The 14-day Relative Strength Index (RSI) dipped below 60.00 after turning overbought near 75.00.

On the other hand, a recent high of 1.1200 and the July 2023 high at 1.1275 will be the next stop for Euro bulls. The decline is expected to remain muted near the psychological support of 1.1000.

Frequently asked questions about the euro

Euro is the currency for the 20 countries of the European Union that belong to the Eurozone. It is the second most heavily traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, representing an estimated discount of 30% on all trades, 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 euro area. The ECB sets interest rates and manages monetary policy. The main mandate of the ECB is to maintain price stability, which means either controlling inflation or stimulating growth. Its main tool is raising or lowering interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.

Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric element for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its peers will typically benefit the euro as it makes the region more attractive as a place for global investors to park their money.

Data releases measure the health of the economy and can have an impact on the euro. Indicators such as GDP, manufacturing and services PMI, 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, it may encourage the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if the 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 particularly significant as they account for 75% of the euro area economy.

Another significant piece of information 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 in a given period. If a country produces highly sought-after exports, then its currency will only gain in value from the additional demand created by foreign buyers wanting to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.

VaselineAugust 30, 2024

0 5 minutes read

Daily Market Reasons: EUR/USD trades sideways ahead of key inflation data

Technical analysis: EUR/USD is consolidating below 1.1100

Frequently asked questions about the euro

Vaseline

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