- Euro vs US Dollar breaks out of range after hawkish comments from Belgium central bank President Pierre Wunsch
- The pair is in a medium-term uptrend which is favored to extend.
- The US Dollar benefits from strong macroeconomic data which suggests the Federal Reserve will have to continue raising interest rates.
The Euro (EUR) has broken above the key 1.1000 level versus the US Dollar (USD) during the European Session on Monday. The single currency is underpinned by market expectations of higher interest rates down the line drawing greater capital inflows into Europe. From a technical perspective, the overall trend is up, giving bulls a wind-in-their-sail’s advantage.
EUR/USD market movers
- The Euro is underpinned by comments from Belgian central bank president Pierre Wunsch, who said “We are waiting for wage growth and core inflation to go down… before we can arrive at the point where we can pause.”
- This supports comments from European Central Bank (ECB) President Christine Lagarde who said there is still “some way to go” before the ECB finishes hiking interest rates.
- The US Dollar benefits from US PMI data pushing into expansionary territory.
- USD further underpinned by hawkish comments from St. Louis Fed’s Bullard who expects more rate hikes due to persistent inflation and overblown recession fears.
- Unexpectedly strong first quarter earnings from US megabanks suggests the sector’s March crisis may be in the rear-view mirror, further supporting the Greenback.
- Data out on May 2 could be key according to European Central Bank’s chief economist Philip Lane. It includes the ECB’s Bank Lending Survey (BLS), giving a snapshot of the health of the region’s banks, and April HICP inflation.
- German IFO survey comes out mixed, with Expectations beating estimates at 92.2 but Business Climate and Current Assessment missing expectations at 93.6 and 95.0 respectively.
- For the US Dollar the Chicago Fed National Activity Index is the most important release, out at 13:30 GMT.
EUR/USD technical analysis: Triangle in an uptrend
EUR/USD breaks out of a triangle pattern within a broader medium-term uptrend that started over eight months ago. The odds favor a continuation of the overarching bull trend.
A break and daily close above the 1.1075 year-to-date highs of April 14 would confirm a continuation of the Euro’s uptrend to the next key resistance level at around 1.1190, where the 200-week Simple Moving Average (SMA) is situated.
A break and daily close below the important lower high at 1.0830, on the other hand, would bring into doubt the validity of the uptrend and could see losses extend down to a confluence of support at 1.0775-1.0800, and a possible reversal of the dominant trend.
EUR/USD: 4-hour chart
Scoping in and looking at the price action on a 4-hour timeframe we can see that the pair has broken out of a probable right-angled triangle pattern which began forming on April 17. The expected target for the breakout is equivalent to the height of the triangle at its widest point, extrapolated from the breakout higher. This gives an eventual target of 1.075, which also, by coincidence, happens to be the year-to-date highs achieved on April 13. A conservative target would be the 61.8% Fibo. extrapolation of the triangle, which would give a target of around 1.1050.
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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The Euro is trading significantly above the key 1.1000 level, following a break-out from a right-angled triangle on the charts.
This major move occurred at the end of last week and indicates market speculation that there could be further upside to the common currency. The break-out from a triangle is generally considered to be a bullish signal, and so predicts gains for the Euro.
However, it is important to note that the Euro still remains vulnerable to possible corrections and pullbacks from these levels.
Recent economic data from the Eurozone has been encouraging, with industrial production for the month of February increasing for the second consecutive month. This has been enough to suggest to market participants that there could be some underlying strength in the Euro.
At the same time, geopolitical tensions, especially centred around the US-China trade war, as well as uncertainty surrounding Brexit, have weighed on the US Dollar. Such factors have only added to the strength of the Euro in recent weeks.
It is likely that the Euro will remain in focus in the near-term as market participants look to see whether this break-out of a well-defined chart pattern will last. For now, the technical chart pattern suggests that further upside is likely, with the 1.1200 level likely to be a key target.