EUR/USD resumes downtrend on diverging interest-rate outlook
- EUR/USD has resumed its short-term downtrend, perhaps due to diverging commentary from central bankers.
- European rate-setters are converging on June as the possible moment for a cut in interest rates as inflation slows.
- Their counterparts in the US are advocating caution in respect to lower interest rates.
EUR/USD edges lower, trading in the lower 1.0800s on Wednesday, shrugging off just-released Spanish inflation data for March which met economists’ estimates of 3.2% for the headline plot.
The pair’s tick lower follows through on the previous day’s bearish reversal from the mid 1.0800s and likely reflects the diverging commentary from rate-setters at the US Federal Reserve (Fed) and European Central Bank (ECB).
Commentary from ECB officials is now indicating a high likelihood it will cut interest rates in June, whilst a delay from the Fed is still possible. This is causing weakness for the Euro and depressing EUR/USD, since lower interest rates tends to reduce foreign capital inflows.
EUR/USD falls as ECB language gets more dovish
On Tuesday, ECB Governing Council member Madis Muller said that “we’re closer to a point where the ECB can start cutting rates.”
He added that “data may confirm the inflation trend for the ECB’s June meeting.”
Just prior to his speaking. ECB Governing Council Member Fabio Panetta said that inflation was quickly falling to target and therefore there was a "consensus emerging" for a rate cut. His views were similar to that of the Bank of Greece Governor Yannis Stournaras.
ECB Chief Economist Philip Lane said on Tuesday that wage inflation – a metric the ECB is following very closely to inform its policy – was “on track” to coming back down to normal levels.
These dovish comments follow those from the Bank of France President Francois Villeroy de Galhau, who said April could even be in the frame for a first cut. Taken together with ECB President Christine Lagarde’s comments at the last ECB policy meeting, when she said the ECB would be reviewing policy on interest rates in June, the evidence is building to a compelling conclusion.
Fed looks more split
By contrast, the Federal Reserve seems more split. Whilst Federal Reserve Chairman Jerome Powell seems to continue to advocate for a June rate cut, and the Fed’s official forecast is for three 0.25% cuts to its feds funds rate in 2024, some individual members have diverged from the official script.
On Tuesday, Federal Reserve Bank of Atlanta Governor Raphael Bostic said the Fed should take things slowly and that he now only expected one rate cut in 2024.
His view echoed those of his fellow Fed member of the board of governors Lisa Cook, who advocated for the Fed taking a “careful approach” to easing over time to “ensure inflation returns sustainably to 2.0%.”
She mentioned housing inflation, which remains quite high, though her view was that it would fall on lower rental demand.
On Monday, Chicago Fed President Austan Goolsbee said the persistence of housing inflation continued to surprise him, but that he felt it would ebb away over time.
"The main puzzle has been about housing," Goolsbee said, a major component in the consumer spending basket that has accounted for a large share of recent headline inflation readings, according to Reuters.
In terms of US inflation, Friday’s Core Personal Consumption Expenditures (PCE) Price Index data for February, considered the Fed’s preferred gauge of inflation, is being held up as the next oracular event for determining when the Fed could cut interest rates.
A higher-than-expected inflation reading in line with most recent gauges of inflation in the US could push back further the time when the Fed is expected to cut interest rates, with negative consequences for EUR/USD.
Technical Analysis: EUR/USD resuming downtrend
EUR/USD turned tail at Tuesday’s highs in the 1.0860s and plunged back down, falling in line with the dominant short-term downtrend.
Euro versus US Dollar: 4-hour chart
A decisive break below the B-wave lows at roughly 1.0795 would signal a continuation of the downtrend to the next target at 1.0750 – then the February lows at roughly 1.0700.
A decisive break is one characterized by a long red bearish candle that breaks cleanly through the level and closes near its low, or three down candles in a row that breach the level.
Alternatively, a move above the 1.0950 level would bring into question the validity of the short-term downtrend.
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.