The euro found some relief on Friday against its counterpart the greenback, which enjoyed only a two-day short-term rally, but Friday erased Thursday’s gains as reflected by the US Dollar Index (DXY). Risk-on impulses affected the dollar’s safe-haven appeal, while an unexpected ECB monetary policy decision on Thursday left traders dependent on market mood. EUR/USD is trading up 0.34% at 1.1817.
The euro pared losses near 1.1820 as the pair steadied due to subdued dollar strength and a positive ECB message.
The shared currency is set to end the week with losses, but it looks like EUR/USD is set to consolidate within the 1.1750-1.1830 area. Economic data in the US showed consumer sentiment improved in February, yet it failed to boost the US dollar.
Thursday’s poor jobs data fueled speculation that the Federal Reserve could cut rates more than twice this year. During Friday’s session, money market prices softened by 62 basis points and then recovered by 54 bps, according to Prime Market Terminal data.
Meanwhile, Fed speakers crossed the wire with Raphael Bostic being hawkish, Mary Daly speaking in a neutral tone, while Vice Chairman Philip Jefferson revealed that a stable labor market reduces inflation risks.
Across the pond, the dock was lighter, yet industrial production data in Germany in December were worse than expected. Meanwhile, European Central Bank (ECB) policymakers stayed tight-lipped, but echoed some of ECB President Lagarde’s speech, in which she said she is not worried about volatility in EUR/USD, especially the strength of the euro. In fact he said that since the summer, the euro “has fluctuated within a range…” and the ECB “concluded that the impact of the exchange rate appreciation from last year is factored into our baseline.”
Next week, the calendar will be busy on both sides of the Atlantic, with speeches from the ECB and Fed dominated. However, the main events will be the non-farm payrolls report for January, retail sales and the consumer price index (CPI), both in the US.
Daily Market Movers: Euro rejects Fed officials’ comments, rises
- Atlanta Fed chief Rafael Bostic said it is important to keep interest rates at a level that restricts economic activity and returns inflation to 2%.
- San Francisco Fed President Mary Daly said policymakers must balance both sides of the Fed’s dual mandate. Meanwhile, Fed Vice Chairman Philip Jefferson said he is “cautiously optimistic” about the economy, adding that current monetary policy is “well positioned” to deal with what lies ahead.
- The decline in job opportunities, the increase in layoffs highlighted by the Challenger report, and the increase in jobless claims have strengthened expectations that the Federal Reserve will begin cutting interest rates in 2026.
- At the same time, the University of Michigan consumer sentiment index for February improved to 57.3 from 56.4, topping forecasts of 55. One-year inflation expectations dropped to 3.5% from 4.0%, while the five-year outlook rose slightly to 3.4% from 3.3%.
- German industrial output declined sharply in December, falling 1.9% month-on-month, according to data released by the Federal Statistics Office on Friday. The decline was much sharper than the 0.3% decline expected by economists.
Technical Analysis: EUR/USD remains range bound within 1.1750-1.1830
The technical picture shows that EUR/USD is but steadily biased downwards after registering a successive series of lower highs and lower lows. The selling momentum is decreasing as shown in the Relative Strength Index (RSI).
To continue the uptrend, buyers need to retest the February 4 daily high of 1.1837. A breach of the latter would expose 1.1900. On the other hand, if the EUR/USD pair falls below the support level of the January 20 high at 1.1769, there will be further losses. The next major support is 1.1700 but once this is conquered, the euro’s decline could extend to 1.1600.
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 area’s four largest economies (Germany, France, Italy and Spain) are particularly important, as they account for 75% of the euro area 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.
