11 Oct 2023

Euro struggles to advance further north of 1.0600, looks at PPI, FOMC Minutes

The Euro trades in an inconclusive fashion vs. the US Dollar.
Stocks in Europe open Wednesday’s session with modest losses.
EUR/USD looks to extend the advance past the 1.0600 barrier.
The USD Index (DXY) trades in monthly lows near 105.70.
Final CPI in Germany rose 4.5% YoY, 0.3% MoM in September.
US Producer Prices, FOMC Minutes take centre stage later in the session.

The Euro (EUR) alternates gains with losses against the US Dollar (USD), motivating EUR/USD to gyrate without a clear direction around the 1.0600 neighbourhood.

The Greenback, in the meantime, remains under pressure south of the 106.00 hurdle when measured by the USD Index (DXY) on the back of a better tone in the risk complex, while market participants continue to digest the recent dovish messages from Fed’s rate setters.

In terms of monetary policy, investors presently expect the Federal Reserve (Fed) to keep interest rates at their current levels for the rest of the year. Simultaneously, market participants are speculating on the prospect of the European Central Bank (ECB) pausing policy changes, despite inflation levels above the bank's objective and rising fears about the risk of a future recession or stagflation in the European area.

On the domestic calendar, final inflation figures in Germany saw the CPI rise at an annualized 4.5% in the year to September and 0.3% vs. the previous month.

Data-wise in the US, the usual weekly Mortgage Applications tracked by MBA are due in the first turn seconded by September’s Producer Prices and the publication of the FOMC Minutes of the September event, when the Fed kept its interest rates unchanged.

Daily digest market movers: Euro appears directionless around 1.0600

The EUR alternates ups and downs vs. the USD.
US and German yields kick off the day slightly on the defensive.
Markets expect the Fed will keep interest rates on hold in the coming months.
Investors believe the ECB will extend the pause of its rate hike campaign.
Geopolitical concerns remain on the rise around the Middle East.

Technical Analysis: Euro now looks at 1.0700 and above

EUR/USD appears poised to consolidate the recent breakthrough of the pivotal barrier at 1.0600.

Continued upward momentum could potentially propel EUR/USD to revisit the weekly high of 1.0736 (September 20), followed by the significant 200-day SMA at 1.0823. If the pair manages to break above this level, there is potential for testing the weekly peak at 1.0945 (August 30) and approaching the psychological threshold of 1.1000. Further breakthroughs beyond the August peak of 1.1064 (August 10) may lead the pair to the weekly top at 1.1149 (July 27) and potentially reach the 2023 peak of 1.1275 (July 18).

Conversely, if selling pressure resumes, there is a possibility of retesting the 2023 low at 1.0448 (October 3) and potentially challenging the significant psychological level of 1.0400. Should this level be breached, it could pave the way for a retest of the weekly lows at 1.0290 (November 30, 2022) and 1.0222 (November 21, 2022).

However, it is important to bear in mind that as long as the EUR/USD remains below the 200-day SMA, the potential for sustained downward pressure persists.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.