- EUR/USD falls to near 1.0450 as the US Dollar rebounds after Fed officials guided that there is no need to make policy adjustments at least for now.
- ECB’s Nagel warned that President Trump’s tariffs will be more vulnerable for Germany.
- Investors await FOMC minutes, which will be released on Wednesday.
EUR/USD declines to near 1.0450 in Tuesday’s European session after failing to hold above the psychological resistance of 1.0500 in the last two trading days. The major currency pair slumps as the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds after attracting bids near a two-month low and recovers to near 107.00 at the press time.
The Greenback discovers buying interest as investors weigh in expectations that the Federal Reserve (Fed) will keep interest rates in the current range of 4.25%-4.50% for a longer period. On Monday, a slew of Fed officials stated that the monetary policy does not need to be adjusted in the current scenario.
Fed Governor Michelle Bowman said in her prepared remarks at the American Bankers Association conference that she would like to gain “greater confidence” that progress in lowering inflation will “continue” as we consider making further adjustments. Bowman added that a steady interest rate stance for now also provides the opportunity to review further “indicators of economic activity“ and get further clarity on the “administration’s policies and their effects on the economy.”
Meanwhile, Philadelphia Fed Bank President Patrick Harker said there are “reasons” enough to hold the “policy rate steady right now,” such as resilient economic growth, a balanced labor market, and still-elevated inflationary pressures. Harker didn’t commit to a timeframe but was optimistic that inflation would ease over time.
For more cues about the monetary policy outlook, investors will focus on the Federal Open Market Committee (FOMC) minutes of the January policy meeting, which will be released on Wednesday. In the policy meeting, the Fed announced a pause in the monetary easing cycle, which started in September. Fed Chair Jerome Powell guided that monetary policy adjustments would be appropriate only when officials would see “real progress in inflation or at least some weakness in the labor market”.
Daily digest market movers: EUR/USD slumps as US Dollar bounces back
- The corrective move in the EUR/USD pair is also driven by some weakness in the Euro (EUR). The outlook for the shared currency is uncertain, as European Central Bank (ECB) policymaker and Bundesbank President Joachim Nagel has warned that US tariffs could weigh on the German economic outlook, which has already suffered from economic contraction for the last two years.
- “Our strong export orientation makes us particularly vulnerable,” Nagel said in his speech at the Speaker’s Luncheon of the Union International Club on Monday. He added that the economic output in 2027 would be almost 1.5% lower than their prior forecast. Currently, the Bundesbank sees the German economy growing by 0.2% this year and 0.8% in 2026.
- Fears of US tariffs on Germany escalated after US President Donald Trump announced during the weekend that he plans to impose tariffs on imported cars starting around April 2. According to data from OEC, the German economy exported $24.3 billion worth of cars to the US in 2023.
- Meanwhile, firm expectations that the ECB will cut interest rates three times more this year have also capped the Euro’s upside. ECB dovish bets are based on growing risks of inflation undershooting the central bank’s target of 2%.
Technical Analysis: EUR/USD drops from 1.0500
EUR/USD falls after facing resistance near the psychological hurdle of 1.0500. However, the outlook for the major currency pair is still bullish as it holds above the 50-day Exponential Moving Average (EMA), which stands at around 1.0430.
The 14-day Relative Strength Index (RSI) struggles to break above 60.00. A bullish momentum would activate if the RSI (14) manages to sustain above that level.
Looking down, the February 10 low of 1.0285 will act as the major support zone for the pair. Conversely, the December 6 high of 1.0630 will be the key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 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-corrects-as-us-dollar-rebounds-on-feds-restrictive-policy-stance-202502180926