- Euro vs US Dollar almost reaches 2023 highs at 1.1075 then pulls back.
- Single currency is boosted by Eurozone bank earnings, showing the sector is in good health.
- Technicals show the uptrend remains intact and is expected to continue.
The Euro (EUR) pulls back after almost touching year-to-date highs above 1.1000 against the US Dollar (USD) during the early European session, on Tuesday. Overall, the single currency is supported by confidence-boosting Eurozone bank earnings, which suggest the sector has weathered the March crisis better than expected. Hawkish comments from rate-setters at the European Central Bank (ECB) further aid the Euro, as the expectation of higher interest rates will lift capital inflows into Europe. From a technical perspective, despite an intraday pullback, the overall trend is up, with the probabilities favoring longs over shorts.
EUR/USD market movers
- The Euro gains strength from comments by Pierre Wunsch, president of Belgium’s Banque Nationale, 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 (hiking rates).”
- The ECB’s chief economist Philip Lane has gone on the record saying interest rates will rise at the May 4 meeting but whether beyond that depends on the data.
- Previously, the Irishman 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 will 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.
- Unexpectedly strong first quarter earnings by US banks suggests the sector’s March crisis may be in the rear-view mirror, further supporting the Greenback.
- The key data release for the US Dollar is Consumer Confidence for April, out at 14:00 GMT. There is no major macroeconomic data out for the Euro.
EUR/USD technical analysis: Nearing year-to-date highs
EUR/USD breaks out of a right-angled triangle (more clearly seen on the 4-hour chart) and unfolds another leg higher, in line with the broader medium-term uptrend that began over eight months ago. The pair came within a few pips of touching the year-to-date highs at 1.1075 before rolling over and pulling back – it currently trades in the 1.1030s. The odds favor a continuation of the dominant Euro bullish trend.
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EUR/USD: Daily Chart
A decisive break above 1.1075 yearly highs touched on 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 located.
For the sake of clarity, the definition of a ‘decisive break’ includes either 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 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, marking a possible reversal of the dominant trend.
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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