- EUR/USD exhibits strength near 1.1130 ahead of the FOMC minutes of its monetary policy meeting in July.
- The Fed kept interest rates steady for the eighth time in a row in July, but Jerome Powell acknowledged discussions over cuts.
- The ECB is expected to resume its policy-easing cycle in September.
EUR/USD hovers near 1.1130 in Wednesday’s European session, the highest level seen this year. The major currency pair aims to revisit 2024 highs of 1.1140 as the US Dollar (USD) remains under pressure amid growing optimism over Federal Reserve (Fed) interest rate cuts in September.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near a fresh seven-month low at around 101.30.
Consistently easing United States (US) inflationary pressures and cooling labor market conditions have convinced investors that the Fed will reduce interest rates in September. However, traders remain split on whether this first interest rate reduction will be a jumbo or a gradual one. The CME FedWatch tool shows that the likelihood of a 50-basis-point (bps) interest-rate cut is at 30.5%. The rest expects a more nuanced 25-basis-point cut.
In Wednesday’s session, investors will focus on the Federal Open Market Committee (FOMC) minutes for the July policy meeting, which will be published at 18:00 GMT. In the July meeting, the Fed left its key borrowing rates unchanged in the range of 5.25%-5.50% for the eighth straight time. The Fed acknowledged that the scope of risks has widened to both aspects of dual mandate (inflation and employment).
This week, the Fed Chair Jerome Powell’s speech on Friday at the Jackson Hole (JH) Symposium – which will be held from Thursday to Saturday – will be the major event as it will provide fresh cues about rate cuts in September. In the press conference after July’s monetary policy announcement, Jerome Powell said: “If we were to see inflation moving down more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting.”
Daily digest market movers: EUR/USD clings to gains above 1.1100 amid weak US Dollar
- EUR/USD stabilizes above the round-level support of 1.1100 as investors have underpinned the Euro (EUR) against the US Dollar. The Euro performs strongly against its major peers amid expectations that the European Central Bank (ECB) will not cut its key borrowing rates aggressively.
- ECB policymakers refrained from committing to a preset course for interest rate reduction as they see inflation in the Eurozone hovering near its current levels, still above target, for the entire year. However, market participants expect that the ECB will cut interest rates again in September, with investors betting on an uncertain economic outlook as Germany, the Eurozone’s largest economy, is going through a rough phase.
- Meanwhile, slower growth in Q2 Negotiated Wage growth in Germany has provided relief to ECB officials, further bolstering optimism over rate cuts in September. The data, released by the Bundesbank – Germany’s central bank – on Tuesday, showed that Negotiated Wages rose by 3.1%, half the pace seen in the first quarter of this year.
- Going forward, investors will keenly focus on preliminary Eurozone HCOB Purchasing Managers’ Index (PMI) data for August and Q2 Negotiated Wage Rates, which will be published on Thursday. The Composite PMI is estimated to have barely improved amid a consistent decline in activities in the manufacturing sector. As for the Negotiated Wage Rate, a key measure of wage growth, it rose by 4.69% in the first quarter of this year and ECB officials would be pleased with a lower reading for the second quarter.
Technical Analysis: EUR/USD aims to recapture year-to-date high of 1.1140
EUR/USD approaches a year-to-date high of 1.1140 ahead of the release of the FOMC minutes. The major currency pair strengthened after a breakout of a channel formation on the daily time frame. Upward-sloping 20-day and 50-day Exponential Moving Averages (EMAs) near 1.0970 and 1.0900, respectively, suggest that the broad trend is bullish.
The 14-day Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, suggesting a strong upside momentum.
Euro bulls would approach the round-level resistance of 1.1200 after breaking above the December 28, 2023, high at 1.1140 decisively. On the downside, the August 15 low at 1.0950 will be a key support area.
Euro FAQs
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%).
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.
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.
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.
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.
Source: https://www.fxstreet.com/news/eur-usd-trades-close-to-year-to-date-high-ahead-of-fed-minutes-202408210905