EUR/USD holds strength as Far Right misses majority, Fed Powell’s testimony in focus

July 9, 2024 11:36 am

  • EUR/USD steadies above 1.0800 as easing US labor market strength weighs on the US Dollar.
  • Fed’s Powell may refrain from providing a specific timeframe for rate cuts.
  • ECB’s Knot doesn’t see the central bank delivering subsequent rate cuts in July.

EUR/USD clings to gains above the crucial support of 1.0800 in Tuesday’s European session. The major currency pair holds gains as the US Dollar (USD) remains under pressure due to firm market speculation that the Federal Reserve (Fed) will start reducing interest rates in September.

According to the CME FedWatch tool, traders see a 77% chance that interest rates will be lower than current levels in the September meeting, up from 65.6% recorded a week ago. Easing United States (US) labor market strength has prompted expectations for the Fed to pivot to policy normalization in September. The Unemployment Rate rose to its highest in more than two years, and Average Hourly Earnings eased expectedly in June, pointing to moderating labor market conditions.

For fresh guidance on interest rates, investors will shift focus to the Fed Chair Jerome Powell’s semi-annual Congressional testimony, scheduled at 14:00 GMT. Powell is expected to reiterate that interest rates need to be held steady at their current levels until they observe a decline in inflationary pressures for months. 

Powell acknowledged, in the European Central Bank (ECB) Forum of Central Banking, that the central bank has made quite a bit of progress on inflation, and recent data shows that the disinflation process has resumed. 

For more clarity on disinflation, investors will focus on the US Consumer Price Index (CPI) report for June, which will be published on Thursday. The core CPI data, which excludes volatile food and energy prices, is estimated to have grown steadily, while headline figures are expected to have decelerated.

Daily digest market movers: EUR/USD remains above 1.0800 as ECB’s Knot sees no rate cut in July

  • EUR/USD turns sideways above 1.0800 after printing a fresh three-week high near 1.0850 on Monday. The major currency pair strengthens as the Euro’s outlook improves after French election polls showed the Marine Le Pen-led-far right National Rally missing an absolute majority. This has reduced the risks of widening France’s debt crisis. 
  • However, political uncertainty remains intact as no Party gains an outright majority. This leads to the formation of a coalition government that results in a significant delay in fiscal decisions due to divergent opinions. Investors expect that Jean-Luc Mélenchon’s left-wing coalition, which unexpectedly gained higher seats than the rest, will join hands with President Emmanuel Macron’s centrist alliance to form a new government.
  • Meanwhile, easing speculation that the ECB will deliver subsequent rate cuts in the July meeting has supported the downside in the Euro. Officials expect price pressures will not deviate far from their current levels this year, but an aggressive policy easing stance could revamp them. 
  • On Monday, ECB policymaker and Dutch central bank chief Klaas Knot pushed back expectations of rate cuts in July. Knot said in an interview with Handelsblatt, “I don’t see a case for another rate cut in July.” However, he remained comfortable with market expectations of more rate cuts this year, and for that, he is open for the September meeting.

Technical Analysis: EUR/USD gains ground above 1.0800

EUR/USD trades inside Monday’s trading range as investors stay on the sidelines ahead of the Fed Powell’s testimony. The major currency pair stabilizes 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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