Home Forex Euro hovers near lows ahead of US consumer sentiment data

Euro hovers near lows ahead of US consumer sentiment data

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  • The euro remains unchanged above 1.0845 with the broader bearish trend intact.
  • Strong US data this week dampened hopes of Fed cuts and supported the US dollar.
  • ECB President Lagarde is holding off on cutting rates before next summer, which has provided some support for the euro.

The Euro (EUR) is trading in a tight range, unable to move significantly away from the monthly lows of 1.0845 in the European trading session on Friday. Strong U.S. macroeconomic data this week prompted investors to reassess their interest rate expectations, boosting American dollar overboard.

Data released on Thursday revealed that initial US jobless claims fell more than expected in the week to January 12. The numbers confirm the picture of a resilient US economy shown by strong retail sales earlier this week and suggest the Federal Reserve still has some work to do to bring inflation back to its target level.

On the calendar today, President of the European Central Bank (ECB) Christine Lagarde he will speak for the last time before a two-week blackout ahead of January’s monetary policy meeting.

In the US, the Michigan Consumer Sentiment Index and the University of Michigan Consumer inflation expectations focus attention. A little later San Francisco Fed President Mary Daly could provide some additional information on the Bank’s monetary policy outlook.

Daily overview of market movements: Euro hovers near monthly lows, weighted by USD strength

  • The euro hovers above the 1.0845 support area as the US dollar strengthens and investors limit hopes of Fed tapering.
  • US jobless claims fell to 187,000 in the week of January 12, down from 203,000 the previous week and against expectations for a rise to 207,000.
  • US unemployment levels confirm the resilience of the US economy and pour more cold water on investors’ hopes for Fed cuts in March.
  • The ECB’s monetary policy accounts released on Thursday reflect policymakers’ belief that inflation is easing, but rate cuts are still off the table.
  • ECB President Lagarde confirmed at the World Economic Summit in Davos that the bank will not cut rates until next summer.
  • Atlanta Fed President Raphael Bostic sees interest rate cuts only in the third quarter.
  • The CME Group FedWatch Tool shows a 55% chance of a rate cut in March, up from 75% last week.

Technical analysis: EUR/USD remains biased lower with support at 1.0845 holding bears for now

The EUR/USD remains virtually flat on Friday and on track for a 0.6% decline this week. The short-term bias is negative and the support level at 1.0845 prevents the pair from falling further.

A clear break below 1.0845 would activate a bearish Head and Shoulders (H&S) pattern increasing negative pressure towards 1.0800 and 1.0725. The H&S measurement targets the 78.6% Fibonacci retracement from the end of 2023 at 1.0600.

On the upside, Euro bulls are likely to encounter significant resistance in the 1.0920/30 area, where previous trendline support meets the confluence of the 4-hour 200 and 50 SMA. Here is another target of 1.1000.

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 charged for 31% of all foreign exchange transactions with an average daily turnover of over 2.2 trillion dollars per day.
EUR/USD is the most traded currency pair in the world, bookkeeping for 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. The heads of the national banks of the eurozone and six permanent members, including ECB President Christine Lagarde, decide.

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.

Frequently asked questions about interest rates

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by the base interest rates that central banks set in response to changes in the economy. Central banks are usually mandated to ensure price stability, which in most cases means aiming for a core inflation rate of around 2%.
If inflation falls below target, the central bank can cut key interest rates to stimulate lending and stimulate the economy. If inflation rises substantially above 2%, this usually results in the central bank raising key lending rates in an attempt to reduce inflation.

Higher interest rates generally help strengthen a country’s currency by making it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of gold because they increase the opportunity cost of holding gold instead of investing in an interest-bearing asset or putting cash in the bank.
If interest rates are high, this usually pushes up the price of the US dollar (USD), and since gold is valued in dollars, this has the effect of lowering the price of gold.

The Fed funds rate is the overnight rate at which US banks borrow from each other. It is the often quoted key rate set by the Federal Reserve at FOMC meetings. It is set as a range, for example 4.75%-5.00%, although the upper limit (5.00% in this case) is the given figure.
Market expectations for the future Fed funds rate are tracked by CME’s FedWatch tool, which determines how many financial markets are behaving in anticipation of future Federal Reserve monetary policy decisions.

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