EUR/USD clings to gains above 1.0800 as Fed rate-cut bets swell

July 8, 2024 10:30 am

  • EUR/USD exhibits strength as growing speculation for Fed rate cuts in September weighs on the US Dollar.
  • US labor market conditions appear to have lost momentum.
  • Unexpected progress by the left wing in French elections has increased uncertainty over the economy’s fiscal outlook.

EUR/USD stabilizes above the round-level support of 1.0800 in Monday’s European session. The major currency pair remains firm as the US Dollar (USD) is under pressure due to growing speculation that the Federal Reserve (Fed) will start lowering interest rates at the September meeting. 

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near a three-week low around 104.85. 

Market expectations for Fed interest rate cut bets in September have increased further amid evidence that the United States (US) labor market is losing momentum. The US Nonfarm Payrolls (NFP) report for June pointed to a slowdown in labor demand as revised estimates showed that the number of individuals hired in April and May was lower by 110K than previously estimated. Also, the Unemployment Rate surprisingly rose to 4.1% from the consensus and the former release of 4.0%.

Also, upside risks to inflation ease as wage growth momentum appears to have slowed in June. The US NFP report showed that Average Hourly Earnings, a measure of wage growth, declined expectedly on a monthly and annual basis.

Cooling labor market strength favors early Fed rate cut bets. According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that the probability of rate cuts in September has increased to 75.8% from 64% a week ago.

Going forward, investors will keenly focus on the US Consumer Price Index (CPI) report for June, which will be published on Thursday. Investors will pay close attention to inflation to know whether the disinflation process, which paused in the first quarter, has resumed. 

Daily digest market movers: EUR/USD remains firm despite uncertainty over Euro’s outlook

  • EUR/USD clings to gains even though the Euro’s outlook appears uncertain as exit polls show that a coalition government will form in the Eurozone’s second-largest economy, France. Polls showed that the left wing, also known as the New Popular Front, led by Jean-Luc Mélenchon, unexpectedly gained the upper hand with President Emmanuel Macron’s centrist alliance and Marine Le Pen-led far-right National Rally as runner-ups.
  • The absence of any party gaining an outright majority has deepened uncertainty over France’s fiscal outlook. This would force the Centralist Alliance to enter into severe negotiations with the Left Wing to distribute new ministries and the election of a new Prime Minister. Meanwhile, Jean-Luc Mélenchon proposed that French PM Macron should resign and the mandate should be given to the left wing to manage the economy.
  • On the monetary policy front, deepening risks of inflation remaining sticky have diminished expectations about the European Central Bank (ECB) delivering subsequent rate cuts. ECB officials are scheduled to meet on July 18 to make decisions on interest rates. 
  • Preliminary Eurozone Harmonized Index of Consumer Prices (HICP) grew steadily by 2.9% year-on-year in June as service inflation remained sticky at 4.1%. In the ECB Forum on Central Banking at Sintra, Portugal, ECB President Christine Lagarde said, “The disinflationary path is going to continue, but we need to be particularly attentive to services.”

Technical Analysis: EUR/USD gains firm footing above 1.0800

EUR/USD gains ground above 1.0800. The major currency pair strengthens after stabilizing above the 20-day and 50-day Exponential Moving Averages (EMAs), which trade around 1.0750 and 1.0770, respectively. The overall trend of the shared currency pair has also strengthened as it has jumped above the 200-day EMA, which trades around 1.0800.

The Symmetrical Triangle formation on the daily timeframe exhibits a sharp volatility contraction, which indicates low volume and narrow ticks.

The 14-day Relative Strength Index (RSI) reaches 60.00. Should the bullish momentum be triggered if it breaks above 60.00?

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.

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