Euro loses traction, revisiting 1.0530 zone on risk-off trade

09 Oct 2023, 16:17 · Views 41

The Euro looks markedly offered against the US Dollar.
Stocks in Europe open the week with marked losses.
EUR/USD retreats to the 1.0520 zone on USD buying.
The USD Index (DXY) reverses recent weakness and tests 106.30.
Industrial Production in Germany surprised to the downside.

The Euro (EUR) is displaying signs of increased weakness against the US Dollar (USD), leading EUR/USD to drop to the 1.0530 zone following three consecutive sessions of gains.

In contrast, the Greenback is reclaiming ground lost and revisiting the 106.30 region when gauged by the USD Index (DXY) in response to the prevailing risk-off sentiment in the global markets at the beginning of the week.

Regarding monetary policy, investors anticipate that the Federal Reserve (Fed) will maintain its interest rates at their current levels for the remainder of the year. Simultaneously, there is speculation in the market about the possibility of the European Central Bank (ECB) pausing its policy, despite inflation levels surpassing the bank's target and mounting concerns about the potential for a future recession or stagflation in the European region.

On the domestic calendar, Industrial Production in Germany contracted at a monthly 0.2% in August.

The US docket will be empty on Columbus Day holiday, while investors’ attention is expected to be on speeches by Dallas Fed President Lorie Logan (voter, hawk), FOMC Governor Michael Barr (permanent voter, centrist) and FOMC Governor Philip Jefferson (permanent voter, centrist).

Daily digest market movers: Euro surrenders part of recent advance

The EUR abandons the area of recent peaks against the USD.
German 10-year bund yields kick off the week on the back foot.
Investors see the Fed refraining from moving on rates in the next months.
Markets believe the ECB will pause its rate hike campaign.
ECB policy maker Martins Kazaks favoured an impasse at the bank’s hiking cycle.
German Industrial Production adds to recession fears.
Speculation on FX intervention in USD/JPY remains firm.
Oil jumps on Israel-Hamas conflict.

Technical Analysis: Euro appears initially capped by 1.0600

EUR/USD resumes the downside and corrects lower from peaks around 1.0600.

The continuation of selling pressure on EUR/USD might result in a review of the 2023 low at 1.0448 seen on October 3, with a challenge of the crucial round mark of 1.0400. If this level is breached, it may pave the way for a retest of the lows of 1.0290 (November 30, 2022) and 1.0222 (November 21, 2022).

If the pair gains momentum, it may aim for the next upward hurdle at 1.0617 from September 29, followed by the important 200-day SMA at 1.0823. If this level is breached, the August 30 high at 1.0945 and the psychological hurdle of 1.1000 may be tested. If the pair breaks beyond the August 10 peak of 1.1064, it might reach the July 27 high of 1.1149 and perhaps the 2023 peak of 1.1275 from July 18.

As long as the EUR/USD remains below the 200-day SMA, additional negative pressure is possible.

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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