- Euro vs US Dollar trades lower after the release of better-than-expected US S&P Global PMIs.
- Euro is supported by comments from ECB’s Lagarde that Governing Council “still has some way to go.”
- US Dollar pressured after poor labor and manufacturing data on Thursday.
The Euro (EUR) is falling sharply against its biggest counterpart, the US Dollar (USD), during the early US session on Friday. The release of better-than-expected US S&P Global PMI data has helped chase away recession fears and is supporting USD. With the banking crisis now seemingly in the rear-view mirror the focus is back on the fight with inflation, and both currencies are benefiting from expectations of higher interest rates. More broadly, the EUR/USD pair appears to be undergoing a correction after making new year-to-date highs of 1.1075 on April 14.
From a technical perspective, the Euro-Dollar pair is in a medium-term uptrend which is expected to continue once the correction has finished. Scoping in, the steadily diminishing volatility on intraday charts is tracing out a triangle pattern, which suggests there will be a breakout move on the horizon.
EUR/USD Market Movers
- The US Dollar strengthens after the release of better-than-expected US S&P Global PMIs showed a rise out of contraction territory for Manufacturing PMI, to 50.4 from 49.2, when a decline to 49 had been expected, and Services at 53.7, when a drop to 51.5 had been expected. Composite PMI also beat expectations with a rise 53.5 when 52.8 had been forecast.
- The Euro temporarily catches a bid after S&P Global Services PMI showed an unexpected gain, coming out at 56.6 when a fall to 54.5 had been forecast. Manufacturing still lags, however, showing a contraction to 45.5.
- The single currency benefits from support after European Central Bank (ECB) President Lagarde says that there is still “some way to go” before the ECB finishes hiking interest rates.
- USD drops a touch after US data disappoints, with 5K more Initial Jobless Claims than expected and the Philadelphia Fed Manufacturing Survey hitting its lowest point for almost three years.
- Nevertheless, the most recent major US economic report, the Fed’s Beige Book, states, “Economic activity was little changed in recent weeks.” Indicating stability.
- USD continues to benefit from policymakers like St. Louis Fed’s Bullard talking up further rate hikes due to persistent inflation and overblown recession fears.
- Unexpectedly strong first quarter earnings from US megabanks draws attention away from the sector’s March crisis, further supporting the Greenback.
- The Euro remains underpinned by expectations that the ECB will continue with interest rate hikes, though their size is up for debate.
- European Central Bank’s chief economist Philip Lane has said the health of the region’s banks, as reported in the ECB Bank Lending Survey (BLS) (out on May 2), will be a key determinant of whether the ECB hikes aggressively or not.
- Lane further sees April HICP (also released May 2) inflation as likewise key to determining the next hike.
- Friday’s calendar shows a speech by ECB vice president De Guindos at 17:45.
EUR/USD technical analysis: Triangle in an uptrend
EUR/USD has been posting higher lows and higher highs since the September 2022 lows, and this medium-term uptrend is likely to continue. Following a correction in February 2023, EUR/USD recouped its losses in March and made new year-to-date highs above 1.1000 on April 13.
Drilling down to the 4-hour chart (below) and price action looks to be tracing out a triangle price pattern which will eventually break out either higher or lower. Triangles are usually composed of five waves. This one now looks complete. If so, then a breakout is likely close at hand.
The Chaikin Money Flow oscillator, is an indicator that is supposed to help give clues as to the eventual direction of a breakout from a range bound market, and it has kept below the zero-line during most of the evolution of the triangle, suggesting a slight bias towards expecting a downside break.
That said, the triangle has a flatter top suggesting it might be of the right-angled variety with a slight bullish bias.
Either way, if price pierces below the 1.0917 lows it will probably confirm a downside breakout, with a target at around 1.0850. Alternatively, a breach of 1.0990 high would confirm an upside breakout, which would likely retouch the 1.1075 year-to-date highs.
Taking a bigger-picture perspective, a break and daily close above the 1.1075 year-to-date highs of April 14 would indicate the overarching uptrend was kicking off again and suggest a move up to the next key resistance level at around 1.1190, where the 200-week Simple Moving Average (SMA) is situated.
For bears, a break and close below the important lower high at 1.0830 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.
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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