- The Euro trades with decent gains against the US Dollar.
- Stocks in Europe trade mostly on the defensive.
- EUR/USD meets decent contention around 1.0500.
- The USD Index (DXY) looks supported around the mid-105.00s.
- German Wholesale Prices rose 0.2% MoM in September.
- US NY Empire State Manufacturing Index takes centre stage in the American session.
The Euro (EUR) starts the new trading week on a positive foot against the US Dollar (USD), encouraging EUR/USD to extend the rebound from the 1.0500 neighbourhood and regain the 1.0540 zone on Monday.
The Greenback sheds some ground following last week’s tops near 106.80 when measured by the USD Index (DXY) against the backdrop of an improved market sentiment for risk assets. Meanwhile, the background of the Federal Reserve’s (Fed) tighter-for-longer stance appears unchanged.
Continuing to focus on monetary policy, investors are anticipating that the Fed will maintain its stance of not making any adjustments to interest rates throughout the remainder of the year. At the same time, those in the financial markets are pondering the possibility of the European Central Bank (ECB) putting a halt to policy modifications, even though inflation levels exceed the bank’s target and concerns are growing regarding the potential for a future economic downturn or stagflation in the region.
On another front, the speculative community kept trimming their net long positions during the week ended on October 10, this time reaching levels last seen in late October 2022. Market participants continued to factor in the likelihood that the ECB’s hiking cycle might have reached a peak against the persistent view that the Fed could maintain its restrictive stance for a longer period than initially anticipated.
On the domestic calendar, Wholesale Prices in Germany rose 0.2% MoM in September and contracted 4.1% over the last twelve months, while the trade surplus in the broader euro bloc widened to €6.7B in August.
In the US, the regional manufacturing gauge tracked by the NY Empire State Index is due, along with September’s Monthly Budget Statement.
Daily digest market movers: Euro looks poised to extend the bullish move
- The EUR picks up fresh upside traction against the USD.
- US and German yields start the week with humble gains.
- Markets anticipate that the Fed will keep rates unchanged.
- Investors expect the ECB will extend the pause in its rate rise campaign.
- Geopolitical tensions in the Middle East remain high.
- The PBoC keeps its One-Year LPR unchanged at 2.50%.
- BoE’s Huw Pill suggests there is further job to do when it comes to tackle inflation.
Technical Analysis: Euro faces the next up-barrier around 1.0640
EUR/USD leaves behind part of the recent two-day lows and manages to gather fresh steam beyond 1.0500 on Monday.
If the upward momentum continues, there is a possibility that EUR/USD could revisit the September 20 high of 1.0736 and potentially reach the significant 200-day Simple Moving Average (SMA) at 1.0822. Breaking above this level may lead to testing the August 30 peak at 1.0945, approaching the psychological threshold of 1.1000. Further breakthroughs beyond the August 10 high of 1.1064 could potentially push the pair towards the July 27 top at 1.1149 and even reach the 2023 peak of 1.1275 seen on July 18.
On the downside, if selling pressure resumes, there is a possibility of retesting the 2023 low at 1.0448 from October 3 and potentially challenging the significant psychological level of 1.0400. If this level is breached, it could pave the way for a retest of the weekly lows at 1.0290 (November 30, 2022) and 1.0222 (November 21, 2022).
As long as the EUR/USD remains below the 200-day SMA, there is a potential for sustained downward pressure.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
