- The Euro trades with small losses against the US Dollar.
- Stocks in Europe navigate a “sea of red” on Wednesday.
- EUR/USD loses some momentum and slips back to 1.0550.
- The USD Index (DXY) looks bid in the low 106.00s.
- Eurozone final inflation figures matched the preliminary readings.
- Housing data, Fedspeak take centre stage in the US docket.
The Euro (EUR) now faces some selling pressure against the US Dollar (USD), dragging EUR/USD to the 1.0550 region on Wednesday.
The Greenback keeps the trade in the low 106.00s when measured by the USD Index (DXY) amidst the equally irresolute price action in the global markets, against the generalized cautious stance in light of increasing geopolitical risks.
Continuing to centre attention on monetary policy, investors anticipate that the Federal Reserve (Fed) will uphold its position of not touching interest rates throughout the remainder of the year. Meanwhile, participants in the financial markets contemplate the possibility of the European Central Bank (ECB) halting policy modifications, despite inflation levels surpassing the bank’s target and mounting concerns about the potential for an economic downturn or stagflation in the region.
On the domestic calendar, the final Inflation Rate for September in the broader Eurozone saw the CPI rise 4.3% YoY and 4.5% YoY when it came to the Core CPI (consumer prices excluding food and energy costs).
Data-wise, in the US, the usual weekly Mortgage Applications tracked by MBA are due in the first turn, while the housing sector is expected to be at the centre of the debate following the release of Housing Starts and Building Permits. In addition, the Fed’s Beige Book and TIC Flows are also due.
Additionally, markets’ attention will also be on speeches by FOMC Governor Christopher Waller (permanent voter, centrist), NY Fed President John Williams (permanent voter, centrist), FOMC Governor Michelle Bowman (permanent voter, hawk), and Philly Fed President Patrick Harker (voter, hawk).
Daily digest market movers: Euro surrenders some ground on USD-buying
- The EUR trades with small losses against the USD.
- US and German yields now trade in a mixed fashion.
- Markets remain focused on the Fed’s tighter-for-longer stance.
- Investors see the ECB could pause its tightening cycle until Q3 2024.
- The crisis in the Middle East could get worse before it gets better.
- Chinese data surprised to the upside.
- UK CPI rose 6.7% YoY in September, a tad above estimates.
Technical Analysis: Euro risks a deeper drop once 1.0500 is cleared
EUR/USD trades in an inconclusive fashion around 1.0570 against the backdrop of a lack of direction in the Greenback.
If the rising trend continues, EUR/USD may revisit the October 12 high of 1.0639, as well as the September 20 top of 1.0736 and the significant 200-day Simple Moving Average (SMA) of 1.0820. A break above this level might signal an effort to break above the August 30 peak of 1.0945 and target the psychological level of 1.1000. Any more gains over the August 10 high of 1.1064 might take the pair towards the July 27 top of 1.1149 and possibly the 2023 peak of 1.1275 seen on July 18.
In the case that selling pressure persists, the 2023 low at 1.0448 from October 3 might be revisited, as well as the major support of 1.0400. If this level is broken, it may pave the way for a retest of the weekly lows of 1.0290 (November 30, 2022) and 1.0222 (November 21, 2022).
As long as the EUR/USD continues below the 200-day SMA, the possibility of continuous bearish pressure exists.
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact 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 results in 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 in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.