EUR/USD ended 0.10% lower on Friday, but finished the week up 0.51% as risk appetite waned amid growing speculation that the Federal Reserve will pause its easing cycle next month. Nevertheless, the pair closed above the 1.1600 figure, paving the way for further gains.
The euro closed slightly lower on Friday, but posted weekly gains supported by mixed Fed signals and steady eurozone growth
Since Wednesday, most Federal Reserve officials have remained hawkish. Regional Fed bank presidents, led by Beth Hammack, Raphael Bostic, Alberto Musallem, Susan Collins, Neel Kashkari, and Jeffrey Schmidt, supported moderately restrictive monetary policy.
Those on the dovish front include Fed Governor Stephen Miron, the San Francisco Fed’s Mary Daly, or even Governors Christopher Waller and Michelle Bowman, who said the labor market is deteriorating.
Neutral stance includes Fed Chairman Jerome Powell and New York Fed’s John Williams. However, keeping his options open amid the lack of economic data, Fed Chairman Powell revealed that the December cut was not a foregone conclusion.
The Prime Market Interest Rate Probability Tool showed that money markets estimated a 56% probability for a 25-basis point rate cut, up from about 70% a year earlier.
In Europe, data showed the economy grew 0.2% quarter-on-quarter in the third quarter. Gross domestic product (GDP) grew year-on-year (YoY) from 1.3% to 1.4%.
Daily market moves: Euro regains gains on Fed’s dovish comments
- The US Dollar Index (DXY), which tracks the dollar’s value performance against six other currencies, rose marginally 0.08% to 99.31 at the time of writing.
- On Friday, Federal Reserve Governor Stephen Miron and Kansas City Fed President Jeffrey Schmidt crossed the wires. The former doubled down on its dovish stance, arguing that recent data “should make the Fed do more dovish, not less,” and warned that policymakers risk making mistakes if they rely too heavily on backward-looking indicators.
- In contrast, Schmid reiterated the reasoning behind his dissent against the latest rate cut, saying: “My rationale for dissenting against the rate cut at the last meeting will continue to guide my thinking in December.” He said he views the current stance of monetary policy as “only moderately restrictive”, which he considers appropriate.
EUR/USD technical outlook: stable around 1.1600
EUR/USD remains bearish and buyers are unable to decisively break the 50-day simple moving average (SMA) at 1.1659. Short-term momentum has improved, with the Relative Strength Index (RSI) elevated and indicating strengthening bullish pressure. A decisive break above the 50-day SMA will highlight the 1.1700 levels.
Conversely, if EUR/USD drops below 1.1600, it will find immediate support at the 20-day SMA near 1.1583, followed by 1.1500. A breach of those levels would highlight the August 1 cycle low of 1.1391 as the next bearish target.
Euro FAQ
The euro is the currency of the 20 European Union countries that belong to the Eurozone. It is the second most 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 more than $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, with an estimated 30% discount on 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 primary mandate of the ECB is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is to increase or decrease 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 the six permanent members, including the heads of the eurozone’s national banks and ECB President 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, the ECB is forced to raise interest rates to bring it back under control. The euro will generally benefit from relatively higher interest rates compared to its peers, as it makes the region more attractive as a place for global investors to park their money.
The data release reflects the health of the economy and could have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the direction of the single currency. A strong economy is good for the euro. This not only attracts more foreign investment but it could also encourage the ECB to raise interest rates, which would directly strengthen the euro. Otherwise, if economic data is weak, the euro is likely to decline. Economic data from the euro zone’s four largest economies (Germany, France, Italy and Spain) are particularly important, as they account for 75% of the euro zone economy.
Another important 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 during a given period. If a country produces highly demanded exports the value of its currency will be derived entirely from the additional demand generated from foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
