- Euro gains a small lift versus the US Dollar on Wednesday after an upwards revision to Euro area inflation data for March.
- USD is supported by strong US banking results, persistent inflation and hawkish Fed commentary.
- Upside for Euro dependent on April inflation data and ECB Bank Lending Survey.
The Euro (EUR) trades above 1.0960 against the US Dollar (USD) during the European session on Wednesday. The pair has gained a lift after Eurozone data showed an upwards revision of core inflation data for March, suggesting the ECB may be more aggresive in raising interest rates at their May meeting. EUR/USD has pulled back over recent sessions after briefly making year-to-date highs of 1.1075 on April 14. The correction comes on the back of a strengthening US Dollar as bets crystalize that the Federal Reserve (Fed) will continue raising interest rates.
From a technical perspective the pair is broadly in a medium-term uptrend which is biased to extend.
EUR/USD market movers
- EUR recieves a small lift after Core Harmonized Index of Consumer Prices (HICP) is revised up to 1.3% from 1.2% in the final estimate for March. This will increase the probability the ECB will raise rates more aggressively at their May meeting.
- USD gains a boost from St. Louis Fed President James Bullard’s comments that the Fed should continue raising rates due to persistent inflation and overblown recession fears.
- Unexpectedly strong first quarter earnings from the likes of JP Morgan and Bank of America indicate resilience in the crisis-hit US banking sector, further supporting the Greenback.
- Data showing a sharp rise in inflation expectations in Friday’s Michigan Consumer Confidence Survey resuscitate the inflation narrative.
- Recent US employment data continues to show a strong labor market further putting pay to recession fears.
- Euro remains supported by expectations that the ECB will continue with interest rate hikes, though their size will be data-dependent.
- European Central Bank’s chief economist Philip Lane has said the health of the region’s banks, as reported in the ECB Bank Lending Survey (BLS), will be a key determinant of whether the ECB hikes aggressively or not.
- Lane is scheduled to deliver a speech at 10:35 GMT on Wednesday – sees April HICP inflation as also key to outlook on rates.
- From the US, the main data release is the Fed’s Beige Book out at 18:00 GMT.
EUR/USD technical analysis: Uptrend intact and likely to extend
EUR/USD is in a medium-term uptrend since recovering from the September 2022 lows and the established trend is expected to continue. After a pullback in February 2023, EUR/USD recouped its losses during March and made new year-to-date highs above 1.10 on April 13.
EUR/USD: Daily Chart
During this week the pair has pulled back down into the mid 1.09s, however, where it currently trades at the time of writing. Given the strength of the overall uptrend, however, it is expected to recover and continue extending higher.
A break and daily close above the 1.1075 year-to-date highs of April 14 would provide bulls with fresh confidence to push higher and the pair could rise up to the next target at around 1.1190 where the 200-week Simple Moving Average (SMA) is situated and likely to provide pushback.
A break and close below the lower high at 1.0830, on the other hand, would bring into the question the strength and validity of the uptrend and could see losses extend down to a confluence of support at 1.0750.
European Central Bank F.A.Q.
What is the ECB and how does it influence the Euro?
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.
What is Quantitative Easing (QE) and how does it affect the Euro?
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.
What is Quantitative tightening (QT) and how does it affect the Euro?
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.
