Market news

19 September 2023

Euro extends the weekly bounce and flirts with 1.0700

  • The Euro trims earlier losses vs. the US Dollar.
  • Stocks in Europe opened Tuesday’s session on a mixed note.
  • EUR/USD looks to revisit the key 1.0700 barrier.
  • The USD Index (DXY) comes under pressure and confronts 105.00.
  • The FOMC meeting (September 20) will be the salient event this week.
  • The US housing sector takes centre stage later in the US calendar.

The Euro (EUR) manages to regain some balance against the US Dollar (USD), motivating EUR/USD to rapidly leave behind the initial drop to the vicinity of 1.0670 and refocus its attention to the 1.0700 hurdle on Tuesday.

On the other hand, the Greenback remains under further selling pressure and is likely to challenge the key 105.00 support sooner rather than later when tracked by the USD Index (DXY), in the context of rising US yields and steady prudence prior to the FOMC event on Wednesday.

In terms of monetary policy, investors are still evaluating the dovish rate hike implemented by the European Central Bank (ECB) last week. Furthermore, they maintain their anticipation of potential interest rate cuts by the Federal Reserve (Fed) taking place at some point in the second quarter of 2024.

In the euro’s data space, the Current Account surplus in the euro area shrank to a seasonally adjusted €20.9B in July, while final inflation figures in the region are also due later in the European morning.

In the US, the housing sector will be in the spotlight as Housing Starts and Building Permits for the month of August are due.

Daily digest market movers: Euro looks to extend the rebound beyond 1.0700

  • The EUR regains some composure vs. the USD.
  • Marginal price action has been seen in US and German yields so far.
  • Markets widely anticipate the Fed keeping rates unchanged this week.
  • According to RBA Minutes, there was a strong consensus to hold rates.
  • Investors continue to price in potential rate cuts by the Fed in H1 2024.
  • An impasse in the ECB’s hiking cycle appears to be gathering traction.
  • ECB’s Francois Villeroy said the rate could be at 4.0% for as long as needed.

Technical Analysis: Euro faces the next hurdle at the 200-day SMA

EUR/USD appears to be gaining strength and moving towards the 1.0700 level, but it is important for the pair to quickly surpass the 200-day SMA at 1.0828 in order to alleviate some of the recent bearish sentiment.

In the event that the EUR/USD breaks below its September low of 1.0631 (September 14), there is a possibility that it may revisit the March low of 1.0516 (March 15) before reaching the 2023 bottom of 1.0481 (January 6).

Currently, the focus is on the critical 200-day SMA at 1.0828. If the pair manages to break above this level, it could potentially lead to a bullish momentum. This could result in a test of the provisional 55-day SMA at 1.0919, seconded by the weekly high of 1.0945 (August 30). If this scenario unfolds, it may open the way for a rally towards the psychological level of 1.1000 and the August top of 1.1064 (August 10). Further upside movement could see the pair aiming for the weekly peak at 1.1149 (July 27), ahead of the 2023 high at 1.1275 (July 18).

However, it is important to note that as long as the EUR/USD remains below the 200-day SMA, there is a possibility that the pair may continue to experience downward pressure.

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.

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