The Euro continues its upward trend against the US Dollar, pushing EUR/USD towards new three-month peaks around 1.0960, a level unseen since mid August.
On the other side of the coin, the Greenback, in terms of the USD Index (DXY), intensifies its decline following the recent breakdown of the crucial 200-day SMA and approaches the key contention area of 103.00.
The Dollar's persistent decline is happening amidst minimal downward bias in US yields across the curve. This decline is fueled by growing speculation about a potential Federal Reserve (Fed) interest rate cut in spring 2024, which remains underpinned by lower-than-expected inflation indicators (CPI and PPI) released last week.
On the euro docket, European Central Bank’s (ECB) President Christine Lagarde will speak on “Inflation kills democracy” in Germany.
Across the ocean, the FOMC Minutes of the November 1 meeting takes centre stage seconded by Existing Home Sales and the Chicago Fed National Activity Index.
EUR/USD extends the bullish move to fresh multi-week tops past 1.0960 on Tuesday.
The November high of 1.0965 (November 21) is currently just ahead of the psychological milestone of 1.1000 for EUR/USD. Further north, the pair might run into the August top of 1.1064 (August 10) and another weekly peak of 1.1149 (July 27), all of which precede the 2023 high of 1.1275 (July 18).
On the other hand, occasional bearish rallies should find first support at the key 200-day SMA at 1.0806, seconded by the temporary 55-day SMA at 1.0648. South of here, the weekly low of 1.0495 (October 13) appears before the 2023 low of 1.0448 (October 3).
Overall, the pair's chances should stay strong as long as it continues above the 200-day SMA.
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%).
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.
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.
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.
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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