Euro gains as receding Fed hike bets weigh on USD; geopolitical risks cap upside
- EUR/USD builds on the overnight bounce from an over-one-week low amid a softer USD.
- Signs of cooling US inflation further temper Fed hike bets and weigh on the Greenback.
- Geopolitical risks should limit losses for the safe-haven buck and cap gains for the major.
The EUR/USD pair attracts some follow-through buyers during the Asian session on Friday and looks to build on the previous day's modest bounce from the vicinity of the 1.1500 psychological mark, or an over one-week low. Spot prices, however, remain confined in a two-week-old range and currently trade below 1.1550 amid mixed cues.
The US Producer Price Index (PPI) report, released on Thursday, fell short of estimates, which, along with soft US Consumer Price Index (CPI), pointed to a slowdown in overall inflation. This gives the US Federal Reserve (Fed) room to hold interest rates steady, which keeps the US Dollar (USD) depressed below a two-week low, touched on Thursday, and lends some support to the EUR/USD pair.
The shared currency, on the other hand, draws support from growing acceptance that the European Central Bank (ECB) will deliver one final 25-basis-point (bps) rate hike at its September meeting as inflation remains above the 2% target. However, persistent geopolitical uncertainties could limit losses for the safe-haven buck and hold back bulls from placing aggressive bets on the EUR/USD pair.
In the latest developments, NATO fighter jets shot down a drone over Latvian airspace early Friday, while Finland imposed a temporary restriction on aviation and maritime traffic in the eastern Gulf of Finland. Adding to this, Reuters reported that Russia downed 15 drones near its border with Finland and Estonia overnight, marking a fresh escalation in an over six-year-old Russia-Ukraine conflict.
Furthermore, traders continue to price in the war-risk premium on the back of the US-Iran standoff over the Strait of Hormuz. Adding to this, the Iran-backed Houthis in Yemen escalated attacks on vessels in the Red Sea and Bab el-Mandeb Strait, and also claimed a drone strike on a Saudi Aramco refinery, raising the risk of a broader regional conflict. This favors USD bulls and should cap the EUR/USD pair.
EUR/USD 4-hour chart
Technical Analysis
The EUR/USD pair maintains a modest bullish near-term bias above the 200-period Exponential Moving Average (EMA) on the 4-hour chart. That said, a breakout through a two-week-old trading range hurdle near 1.1565 is needed to back further gains. On the downside, immediate support aligns with the lower boundary of the range near 1.1500, with stronger underlying demand seen at the 200-period EMA around 1.1489. The latter reinforces the broader floor for the pair on this timeframe.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.
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