EUR/USD, the most liquid currency pair in the world, is under pressure. The state has a hard time keeping up with that upward climb. Accounted for an estimated 30% of all foreign exchange transactions, the pair reflects broader economic dynamics between the Eurozone and the United States. Increased optimism over a possible US-EU bilateral trade deal, or Transatlantic Trade and Investment Partnership (TTIP), has bubbled up in recent weeks. This optimism has strengthened the US Dollar and weakened the Euro.
After simply recently topping as high as 1.1420, the market has actually remedied back to the 1.1350 area. Analysts find mixed blessings in the recent drop, but continue to have an upbeat view on the short-term direction for EUR/USD. The currency pair remains above important support levels, notably the 20-day Exponential Moving Average (EMA) currently at 1.1277.
Economic Context of EUR/USD
The Euro is the common currency shared by 19 of the Eurozone’s 27 member states. As a result, it is the second most traded currency on Earth, behind only the US Dollar. The US Dollar Index (DXY) gauges the Greenback’s strength relative to a trade-weighted basket of six major currencies. Recent movements on the index have tracked the sentiment of evolving trade talks.
T U W economic performance of Germany, France, Italy and Spain in determining the overall T U W health of the Euro. These four largest economies in the Eurozone are integral to the stability and growth of the block. Together, these countries represent roughly three-quarters of the Eurozone’s GDP. In 2022, EUR/USD transactions accounted for a stunning 31% of all forex trades. At the same time, they claimed a stunning average daily turnover that topped $2.2 trillion.
As these fundamental economic signals come to light, market participants become acutely aware of inflationary pressures and monetary policy stances that could affect relative currency values. More recent news, like data from France, suggests inflation may have cooled in May. The annual Consumer Price Index (CPI) barely moved — only up 0.6%, compared to an increase of 0.9% in April. This persistent trend may change how the European Central Bank (ECB) approaches short-term interest rate hikes.
Market Response and Technical Analysis
Between recent corrections, operators are still confident about the continuing trajectory of EUR/USD. The duo experienced the selling frenzy as soon as it was able to put some distance above the 1.1400 handle. Expectations for a quick US-EU trade deal provided support for the US Dollar. The market’s technical indicators tell an important story. For instance, the 14-period Relative Strength Index (RSI) is struggling to clear above the 60.00 level, which suggests a potential deceleration in upward momentum.
As speculators look to see where they might go next, they are focused like a laser on important support and resistance levels. The September 25 high of 1.1215 is now an important support line for Euro bulls. At the same time, the April 11 high at 1.1475 represents a major reversal wall that threatens to derail any advance.
“The EU Commission remains fully committed to constructive efforts at pace towards an EU-US deal. We continue to stay in constant contact.” – Maros Sefcovic
Market watchers point out that increased Euro interest rates compared to other currencies usually strengthen the Euro. With every potential ECB interest rate cut on the horizon, the latest inflation data is pointing towards easing.
Implications for Future Trade Relations
The ongoing negotiations between the US and EU are crucial not only for trade relations but for currency valuations. As negotiations continue, stay tuned for news or a deal. At worst, they could trigger pandemonium and huge swings in the Euro and US Dollar.
François Villeroy de Galhau pointed out that recent inflation trends signal a “very encouraging sign of disinflation in action,” which may influence ECB policies in the near term. If inflation keeps on the track of cooling, that might change expectations around interest rate hikes.
The dynamic between economic fundamentals and the impact of monetary policy will continue to be at the heart of EUR/USD’s price action in the future. Investors will have to stay glued to the upcoming economic data releases. Given how much central bank communications can sway market sentiment, pay attention!