EUR/USD posted modest losses during Friday’s North American session as the US dollar (USD) held firm following the release of mixed economic data and dovish comments from Federal Reserve (Fed) officials. The pair is trading at 1.1504, down 0.20%, after hitting a two-week low of 1.1491.
Euro retreats 0.20% as weak US sentiment contrasts with firmer PMIs, markets rise December odds cut
US data was mixed, yet the economy is showing signs of resilience. S&P Global Manufacturing and Services PMIs were mixed in November but revealed that business confidence improved.
Other data showed US households were pessimistic about the economy viewaccording to the University of Michigan (UoM) consumer sentiment for November. Sentiment hit its lowest level since 2009 as consumers continue to be frustrated by high prices and weakening incomes.
EUR/USD reaction was muted after the data as traders digested mixed comments from many Federal Reserve System officials.
Dovish comments from New York Fed President John Williams and Governor Stephen Mirano bolstered investor expectations for a 25 basis point rate cut at the December meeting. Boston Fed President Susan Collins and Dallas Fed President Lorie Logan, on the other hand, argued for maintaining a restrictive policy stance, signaling support for maintaining rates without change.
Given this situation, market participants priced in a 71% chance of a December rate cut, a sharp jump from around 31% at the start of the day.
Daily market moves: Euro slips despite dovish Fed
- New York Fed President John Williams said policymakers could still cut rates in the “near term,” a comment that raised market odds for a December move. In that vein, Fed Governor Stephen Miran said Thursday’s Nonfarm Payrolls data supported a December rate cut, adding that if it were his vote he would “vote for a 25 basis point cut.”
- On the other hand, Dallas Fed President Lorie Logan argued that rates must remain unchanged “for some time” while the Fed assesses the impact of current policy on inflation, saying it is “difficult” to support a cut in December. Boston Fed President Susan Collins agreed, stressing that “tightening is very appropriate right now.”
- The S&P Global Manufacturing PMI fell to 51.9 in November from 52.5, coming in just below the consensus of 52. In contrast, the Services PMI rose to 55 from 54.8, beating expectations and signaling continued resilience in the sector.
- The University of Michigan’s index of consumer sentiment rose to 51 in November from a preliminary 50.3, beating forecasts but down from October’s 53.6. Inflation expectations improved, with the annual outlook softening to 4.5% from 4.7% and the five-year gauge falling to 3.4% from 3.6%.
- The US Bureau of Labor Statistics (BLS) revealed that non-farm payrolls rose by 119,000 in September, double the estimate of 50,000. Despite the solid number, the unemployment rate jumped from 4.3% to 4.4%, but remained within the Federal Reserve’s projections.
- European Central Bank (ECB) speakers have crossed wires. Joachim Nagel said he was confident the central bank would meet its inflation mandate. ECB Vice President Luis de Guindos said risks to growth are balanced and the key interest rate is at an appropriate level.
- Eurozone manufacturing activity slipped back into contraction territory in November, with the manufacturing PMI falling to 49.7 from October’s 50, missing expectations for an improvement to 50.2. The services PMI rose to 53.1 from forecasts of holding at 53.
Technical Outlook: EUR/USD downtrend continues as bears gain traction
EUR/USD extended its losses and is hovering around 1.1500 after hitting a daily low of 1.1491. A daily close below the first would open the door to further declines. The next support levels would be 1.1491, the daily low of November 5 at 1.1468 and the 200-day SMA near 1.1405.
For a bullish reversal, buyers need to clear the 20-day SMA at 1.1566, followed by the confluence of the 50- and 100-day simple moving averages (SMA) at 1.1641/1.1650. Next lies 1.1700.
Euro frequently asked questions
The euro is the currency of the 20 countries of the European Union that belong to the eurozone. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions with an average daily turnover of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world and represents an estimated 30% discount on all trades, 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 raising or lowering interest rates. Relatively high interest rates – or expectations of higher rates – usually benefit the euro and vice versa. The Governing Council of the ECB takes decisions on monetary policy at meetings held eight times a year. Decisions are made by the heads of the national banks of the eurozone and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric indicator for the euro. If inflation rises more than expected, especially if it is above the ECB’s 2% target, it obligates the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its peers will usually benefit the euro, making the region more attractive as a place for global investors to park their money.
The published data assesses the health of the economy and may have an 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 will this attract more foreign investment, but it may encourage the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if the 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 particularly significant as they account for 75% of the euro area economy.
Another important data release for the euro is the trade balance. This indicator measures the difference between what a country earns on exports and what it spends on imports for a given period. If a country produces a highly sought-after export, then its currency will gain in value purely due to the extraordinary demand created by foreign buyers who want to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa a negative balance.
