- Euro vs US Dollar trades back in the green after a steep sell-off on Tuesday.
- US recession woes and banking fears were given as the major catalysts for the sell-off.
- The trend remains bullish according to technical analysis, however, with the 1.1075 YTD highs as the next key level on the radar.
The Euro (EUR) trades back above 1.1000 against the US Dollar (USD) during the early European session, on Wednesday. The pair has stabilized after the market turbulence witnessed on Tuesday in which the pair fell over 100 pips on a sudden surge in USD strength. Whilst the general consensus is the move was driven by safe-haven flows due to US recession and banking fears, it’s also possible it was helped by hedge funds racing to cover a massive $10B failed US Treasury bond short.
Despite Tuesday’s sell-off, from a technical perspective the overall trend is still up, with the probabilities favoring longs over shorts.
EUR/USD market movers
- The US Dollar surged on Tuesday due to safe-haven flows from recession and banking-crisis fears.
- The news that ailing lender First Republic Bank is mulling over whether to sell $100B of its loans – over half its loan book – to shore up its balance sheet, resurrects banking-crisis fears.
- Lower-than-expected US Consumer Confidence figures for April eclipsed higher-than-expected New Home Sales and were viewed as evidence of a possible impending US recession.
- That said, US T-bond yields, especially of a two-year maturity, plummeted dramatically, as investors reassessed the possibility the Federal Reserve (Fed) might start cutting rates sooner than had been expected.
- The Euro has been supported by overall hawkish comments from ECB officials.
- Pierre Wunsch, president of Belgium’s Banque Nationale, said, “We are waiting for wage growth and core inflation to go down… before we can arrive at the point where we can pause (hiking rates).”
- The ECB’s chief economist Philip Lane also went on record as saying interest rates will rise at the May 4 meeting but whether beyond that depends on the data.
- Previously, the Irishman had said a lot is riding on the state of Eurozone banks, as assessed by the ECB’s Bank Lending Survey out on May 2, as well as April flash HICP inflation data released on the same day.
- Strong first quarter earnings by European banks due to higher interest margins, however, suggest the BLS may paint a favorable picture.
- Banco Santander’s recently released Q1 earnings, for example, beat profit estimates of 2.4B with 2.57B.
- ECB President Christine Lagarde recently said there is still “some way to go” before Frankfurt is done with hiking interest rates.
- The US Dollar is at a disadvantage since Federal Reserve (Fed) officials are in the two-week blackout period before the May 4 meeting, during which time they are not allowed to comment.
- Prior to the blackout, St. Louis Fed’s Bullard was hawkish, saying he expects more rate hikes due to persistent inflation and overblown recession fears.
- The key data release for the US Dollar on Wednesday is March Durable Goods Orders out at 12:30 GMT. For the Euro, the main release has come and gone, with German Consumer Confidence Gfk in May, which came out at -25.7, beating the previous result by 2 bps.
EUR/USD technical analysis: Nearing year-to-date highs
EUR/USD peaks at 1.1067 and rolls over, dropping over a 100 pips in a day. That said, it has found a floor and recovered, and is currently trading back above 1.1000. Tuesday’s decline was violent but despite that the broader medium-term uptrend remains intact – and will continue to – as long as the 1.0830 lows hold. Overall the odds favor a continuation of the dominant Euro bullish trend.
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EUR/USD: Daily Chart
A decisive break above the 1.1075 year-to-date highs 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 located.
For the sake of clarity, a ‘decisive break’ might be a ‘breakout candle’ – a long green bullish daily candle that extends above the 1.1075 highs and closes near its high, or three smaller bullish green candles in a row that break above the highs.
Alternatively, a break and daily close below the key lower high at 1.0830 could see losses extend down to a confluence of support at 1.0775-1.0800, marking a possible reversal of the dominant trend.
Euro FAQ
Euro FAQs
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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