The EUR/USD currency pair, the most traded pair in the world, is worth noting as it has staged a big return. It has even risen above 1.1640 as stakes become larger in US-EU trade relations. This announcement follows a meteoric couple of weeks marked by former President Donald Trump’s inflammatory comments about buying Greenland. Global traders are fleeing the US Dollar, a sign of changing trader sentiment. This change comes at the behest of a willing hunger for risk, but has as its concomitant a strengthening in the Euro currency.
In fact, the EUR/USD pair makes up about 30% of all foreign exchange transactions around the world. In 2022, it accounted for 31% of all of the forex trades, with a remarkable average daily turnover well over $2.2 trillion. This dramatic move further illustrates the Euro’s status as the world’s second most traded currency. It’s right there, nipping on the heels of the US Dollar.
Current Market Dynamics
To illustrate, on Monday, the EUR/USD pair spiked up by more than 0.40%. It was last trading at 1.1642 after recovering from daily lows of 1.1576. The price quickly surged up after it initially bounced off the 200-day Simple Moving Average (SMA) located at 1.1586. This storm wave led to an immediate increase of more than 60 pips. Market analysts are looking out for sharp sellers with an eye on important resistance levels. The aforementioned first resistance is the 50-day SMA – currently at 1.1656 – then comes the 20-day SMA at 1.1695, with a key psychological line in the sand at 1.1700.
An even more successful break above these resistance levels, especially the $17 to $18 range, could spark further gains. Such momentum could see the pair take aim at the next target of 1.1800. Conversely, for a bearish outlook to gain momentum, a significant breach below the 200-day SMA at 1.1586 would be essential. A drop of this magnitude would result in far deeper losses. Support levels are at 1500, and there’s a possibility we could see a deeper retracement down to the August 1 low of 1.1391.
Interest Rates and Investment Sentiment
Indeed, the Eurozone’s real interest rates are among the highest in the world today. This usually strengthens the Euro and renders it appealing to international investors looking for secure returns. As traders reassess their positions in light of geopolitical uncertainty, this dynamic could drive even more pronounced flows and market moves.
These new trade war dynamics between the United States and Europe have spooked investors. In recent weeks, Trump’s incendiary comments on Greenland have raised the stakes, forcing traders to re-evaluate their risk exposure. Investor confidence is shaking. Consequently, many are looking to the Euro, a currency historically considered a safe haven asset during turbulent times.
Inflation Trends and Economic Indicators
Recent data released out by Eurostat suggest that this could be changing, with underlying inflation in the Euro area declining from 2.4% to 2.3%. This is an exciting development, as it’s the first occasion since May of 2021 that inflation has dipped under the European Central Bank’s (ECB) target. This decline is not an anomaly but rather a marker of the region’s shifting economic landscape.
In December, Euro area inflation fell from 2.1% to 1.9%. This decrease was below what had been anticipated, as it was expected the overall rate would hold constant at 2%. This trend may already affect future ECB policy choices. Central bankers should all be interested in the implications for economic growth and the conduct of monetary policy.