Euro trades in mid 1.09s after Eurozone PMI data

By Forex Uy tín On Th4 21, 2023

Euro vs US Dollar trades in the mid 1.09s, after rising slightly following euro area S&P Global PMIs.
Euro further 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) snakes along in the mid 1.09s against its biggest counterpart, the US Dollar (USD), during the early European session on Friday. 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 Euro rallies intraday 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 gains further 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.
For USD the calendar’s highlights include are S&P Global PMI’s at 13:45 GMT.

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.

EUR/USD: Daily Chart

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.

EUR/USD: 4-hr Chart

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.

European Central Bank FAQs

What is the ECB and how does it influence 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 for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

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