Euro sinks to three-week lows near 1.0940 ahead of key inflation data

Euro extends its decline well south of 1.1000 against the US Dollar.
Stocks in Europe open Friday’s session mostly on the defensive.
EUR/USD weakens to three-week lows near 1.0940.
Flash Q2 GDP Growth Rate in Germany came in short of estimates.
Investors’ attention remains on US PCE, advanced Germany’s CPI.

The Euro (EUR) continues to face significant pressure and loses ground against the US Dollar (USD) as the week comes to a close, resulting in EUR/USD weakening to levels not seen in three weeks, near 1.0940.

The rapid decline in the pair gained momentum after the European Central Bank (ECB) decided to raise its policy rates by 25 bps on Thursday. This decision came together with a dovish message, as the bank indicated the possibility of a pause in its rate-hiking cycle as early as the September meeting. The ECB also painted a less-optimistic picture regarding the economic outlook for the region.

Regarding the potential rate pause, President Christine Lagarde appears to have reinforced this view by suggesting an “open-minded” approach to the September meeting. She also emphasized that future rate decisions will depend on economic data.

As investors continue to sell off the Euro, the US Dollar Index (DXY) is gaining traction and may potentially test the 102.00 region. This is supported by continued buying interest in the Greenback towards the end of the week, along with higher yields in the US bond market, particularly in the belly and the long end of the curve.

On the domestic front, preliminary GDP figures in Germany indicate a 0.2% YoY contraction in the economy for the April-June period. Later in the session, advanced inflation figures are expected to be released for Germany, as well as the final Consumer Confidence data for the broader euro area.

In the US, all eyes are on the release of inflation figures, measured by the PCE and Core PCE. Additionally, other crucial data to be released includes Personal Income, Personal Spending, Employment Costs Index, and the final Michigan Consumer Sentiment gauge.

Daily digest market movers: Euro regains downside pressure after ECB

The EUR accelerates losses after breaching 1.1000 against the USD.
The USD Index faces extra buying pressure and flirts with 102.00.
German preliminary Q2 GDP figures disappoint.
US, German 10-year yields advance modestly.
Investors’ focus will be on German CPI, US PCE.
The BoJ surprises everybody after tweaking its yield-curve-control stance.
ECB’s Simkus, Vasle suggested a pause in September is an option.
ECB’s SPF sees inflation barely changed in the next three years.

Technical Analysis: Euro could potentially drop to the 1.0900 region

EUR/USD breaks below the 1.1000 key support with apparent determination, suggesting that a potential deeper pullback is in store in the short-term horizon.

If bears push harder, EUR/USD should meet immediate contention at the temporary 55-day and 100-day SMAs at 1.0905 and 1.0902, respectively. The loss of this region could open the door to a potential visit to the July 6 low of 1.0833 ahead of the key 200-day SMA at 1.0717 and the May 31 low of 1.0635. South from here emerges the March 15 low of 1.0516 before the 2023 low of 1.0481 on January 6.

On the other hand, occasional bullish attempts could motivate the pair to challenge the 2023 high at 1.1275 recorded on July 18. Once this level is cleared, there are no resistance levels of significance until the 2022 peak of 1.1495 on February 10, which is closely followed by the round level of 1.1500.

The constructive view of EUR/USD appears unchanged as long as the pair trades above the key 200-day SMA.

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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