- The Euro pares initial losses vs. the US Dollar.
- Stocks in Europe remain in the red on Wednesday.
- EUR/USD bounces off lows around 1.0710 midweek.
- The USD Index (DXY) fades most of its initial gains.
- EMU Industrial Production contracted more than expected in July.
- US headline CPI rose more than expected in August.
The Euro (EUR) regains the smile against the US Dollar (USD) on Wednesday, prompting EUR/USD to reclaim the area above 1.0750 in the wake of the release of US inflation figures.
On the USD-side of the equation, the Greenback gives away most of its earlier advance and revisits the 104.60 region when tracked by the USD Index (DXY) after US inflation readings showed the headline CPI rising more than estimated by 3.7% YoY in August and 4.3% YoY when it comes to the Core CPI. The knee-jerk in the Dollar also comes in tandem with a U-turn in US yields in the short end and the belly of the curve.
In terms of monetary policy, the anticipation of a potential interest rate hike by the Federal Reserve (Fed) in November seems to have waned recently, while market participants continue to factor in the likelihood of rate cuts taking place in the second quarter of 2024.
Turning our attention to the European Central Bank (ECB), market discussions seem to lean towards a pause at Thursday’s meeting and an additional quarter-point rate raise by year-end, given the current state of a somewhat divided Council.
Looking at the euro docket, Industrial Production in the euro bloc contracted at a monthly 1.1% in July and 2.2% from a year earlier on Wednesday. Across the ocean, Mortgage Applications measured by MBA contracted 0.8% in the week to September 8, while the EIA’s report on crude Oil inventories are due later in the NA session.
Daily digest market movers: Euro keeps the range bound unchanged ahead of ECB
- The EUR trims part of daily losses against the USD.
- US yields drop and German yields keep the upside bias.
- Markets now see the ECB keeping the deposit rate unchanged on Thursday.
- UK GDP results missed estimates in July.
- Markets keep adjusting to potential rate cuts by the Fed in Q2 2024.
- Producer Prices in Japan rose more than expected in August.
- The PBoC will promote measures to stimulate demand.
- German GDP could contract 0.3% this year.
Technical Analysis: Euro’s upside remains limited by the 1.0830 region
EUR/USD’s weekly recovery seems to have met a decent resistance area around 1.0770.
If EUR/USD manages to break below the September 7 low at 1.0685, it may enter a phase of retesting the May 31 low at 1.0635 before potentially reaching the March 15 low at 1.0516. A breach of the latter level could initiate a possible examination of the 2023 low at 1.0481 seen on January 6.
On the upside, the current focus is on targeting the crucial 200-day Simple Moving Average (SMA) at 1.0826. Beyond that point, a bullish momentum might lead to a challenge of the weekly peak at 1.0945 from August 30, further supported by the provisional 55-day SMA at 1.0935. Subsequently, this scenario could pave the way for an advance towards the psychological level of 1.1000 and the August high at 1.1064 seen on August 10. If the spot clears this area, it could alleviate some of the bearish pressure and potentially aim for July’s 27 peak at 1.1149, followed by the 2023 top at 1.1275 from July 18.
As long as the EUR/USD remains below the 200-day SMA, there is a possibility of a sustained decline in the pair.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Source: https://www.fxstreet.com/news/euro-comes-under-some-mild-pressure-near-10750-ahead-of-us-cpi-202309130813