The EUR/USD currency pair, the most widely traded currency pair in the world, fell to around 1.1400. This fall came in the midst of European Tuesday trading hours. Clients are understandably skittish about US-China trade, the outlook for which is anyone’s guess right now. They are very specifically wringing their hands about the strength or weakness of the US Dollar. Despite the US Dollar Index (DXY) ticking up to just under 99.20, the Greenback is pretty much steady, continuing to trade in the range established on Monday.
As the official currency for 19 of the 27 member states, the Euro is a symbol of European integration and unification. Today it is a little bit under pressure as market participants react to European Central Bank (ECB) officials calling for more monetary policy expansion. The general outlook for the EUR/USD pair is bullish. Despite this positive move, bulls enjoy strong support in the form of a bullish Relative Strength Index (RSI) and an overall upward trajectory of its 20-week Exponential Moving Average (EMA).
Market Dynamics and Influences on EUR/USD
The EUR/USD pair accounts for an impressive 31% of all foreign exchange transactions, with an average daily turnover exceeding $2.2 trillion in 2022. This incredible amount speaks to its importance as a pillar of global finance, as well as the Euro’s relative strength against other currencies. The Euro gets to bask in the glow of high interest rates. This further increases its draw for worldwide investors looking for a safe place to stash their cash.
Tuesday morning European fell below the key EUR/USD 1.1400 area. This decline mainly occurred due to a stabilizing US Dollar and increasing US selling pressure on the Euro. Short-sellers need to clear the psychological level at 1.1500 that serves as major resistance for this currency pair. Analysts point out that a breach of such magnitude might indicate a more robust bullish EUR/USD trend.
This bullish momentum is confirmed by the 14-week RSI for EUR/USD, which shot over 70.00 on the weekly chart – a strong bullish signal. Despite the recent decline, the indicator hit overbought territory. The July 2023 high of 1.1276 has now formed an important support level for Euro bulls. As a result they’re sailing smoothly through these turbulent, unprecedented market conditions.
Comments from Economic Leaders
Against this consistently volatile backdrop, testimony and comments from America’s economic leaders have complicated and amplified market sentiment. And ECB policymaker Olli Rehn hinted last week that the current interest rate path must be reconsidered. He warned that we shouldn’t rule out rate cuts below the neutral level. He stated:
“We must analyse all options with an open mind and not a priori rule out rate cuts below the neutral rate.”
Policymakers in the Eurozone have been raising the inflation risks alarm. They fear that inflation will be too low, below the ECB’s target of 2%. Just as Rehn’s comments echo around the global financial markets, they are adding to the heavy selling pressure on the Euro.
Additionally, François Villeroy de Galhau, Governor of the Bank of France and an ECB official, noted that there is still room to lower interest rates. His comment colorizes the dominating current economic rhetoric around the Euro. This change has a direct effect on the EUR/USD cross.
“We still have room to lower interest rates.” – François Villeroy de Galhau
The Broader Economic Context
Sitting alongside interest rates and inflation among the most critical underlying factors impacting the active EUR/USD crossrate. Then came the recently released data from Spain which told a different, better story. Harmonized Index of Consumer Prices (HICP) inflation increased by a steady 2.2% y-o-y in April. Those data points are key measures for assessing inflationary pressure in the Eurozone. They afford considerable influence on the active monetary policy decisions taken by the ECB.
As investors continue to look for more signs on the future of US-China trade relations, they’re still worried by the risk it poses to both economies. US Treasury Secretary Scott Bessent pointedly remarked on this dynamic, stating:
“I believe that it’s up to China to de-escalate, because they sell five times more to us than we sell to them.”
Global market analysts were delving into the relationship between trade dynamics and currency performance. That should continue to be their north star, as they chart a course through this uncharted territory.