EUR/USD falls as the Fed looks to gradually cut interest rates

VaselineSeptember 9, 2024

0 5 minutes read

EUR/USD falls as the Fed looks to gradually cut interest rates

EUR/USD slips below 1.1050 as the US dollar strengthens on expectations that the Fed will opt for a small interest rate cut this month.
Investors await the US CPI on Wednesday for further guidance on interest rates.
The ECB is expected to cut interest rates this week.

EUR/USD extends its decline below 1.1050 in the European session on Monday. The major currency pair is lower as the US dollar (USD) strengthens after mixed indications on the current health of the labor market from Friday’s United States (US) payrolls (NFP) report for August, which eased market expectations for the Federal Reserve (Fed) to cut interest rates aggressively this month.

The US Dollar Index (DXY), which tracks the greenback against six major currencies, is nearing 101.50.

The official employment report showed that fresh wages were less than expected, the unemployment rate fell as expected and average hourly earnings, a key measure of wage growth, rose at a faster pace than the one provided.

Market participants focused mainly on the jobs numbers as the Fed appeared to be confident that price pressures were on track to return to the central bank’s desired rate of 2%. Slower job demand added to evidence that U.S. economic growth is moderating. However, the pace of decline was less than the impression in July, which eased recession fears and the Fed’s big bets on rate cuts.

According to the CME FedWatch tool, the probability that the Fed will cut interest rates by 50 basis points (bps) to 4.75%-5.00% in September is 27%, while the rest favor a rate cut of 25 basic points.

Going forward, the US dollar is expected to witness more volatility this week as US consumer price index (CPI) data for August is lined up for release on Wednesday.

Daily Market Reasons: EUR/USD slips as US dollar makes sharp gains

EUR/USD underperformed its major peers on Monday as investors focused on the European Central Bank’s (ECB) policy decision to be announced on Thursday. The ECB is expected to cut key lending rates again by 25 basis points (bps). This would be the ECB’s second dovish interest rate decision in its current policy easing cycle, which it started at the June meeting but kept interest rates unchanged in July.
The ECB is all but certain to cut interest rates this week as price pressures in the eurozone have significantly limited and growing uncertainty about the economic outlook. Eurozone preliminary headline Harmonized Index of Consumer Prices (HICP) fell to 2.2% in August, the lowest reading since July 2021. The economic outlook in the eurozone is weak due to subdued demand from domestic and overseas markets increase.
The German economy has been exposed to a technical recession as the nation’s growth contracted in the second quarter of this year and the outlook for the third quarter remains uncertain.
Meanwhile, ECB policymakers have also acknowledged growing weakness in the German economy and see more interest rate cuts as appropriate for the rest of the year. Last week, Piero Cipollone, a member of the ECB board, said: “There is a real risk that our position will become too restrictive.”
Turning to economic data, the Eurozone Sentix investor confidence worsened further to -15.4 in September from -13.9 in August. This appears to be the result of the deteriorating health of the economy amid the slowing German economy.

Technical analysis: EUR/USD slips below 1.1050

EUR/USD dips below 1.1050 in European trading hours on Monday. The major currency pair is weakening after failing to hold above the crucial 1.1100 resistance. The near-term outlook for the shared currency pair turned uncertain as it dipped below the 20-day exponential moving average (EMA), which is trading around 1.1060.

The 14-day Relative Strength Index (RSI) is further down at 50.00, suggesting a lack of bullish momentum.

The pair is expected to find support near the psychological level of 1.1000. On the other hand, last week’s high of 1.1155 and round level resistance of 1.1200 will act as major barricades for Euro bulls.

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 important 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.

VaselineSeptember 9, 2024

0 5 minutes read

Daily Market Reasons: EUR/USD slips as US dollar makes sharp gains

Technical analysis: EUR/USD slips below 1.1050

Frequently asked questions about the euro

Vaseline

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