The Euro had just crossed above the very key psychological level of 1.0000 against the US Dollar, an important and historic moment for the EUR/USD currency pair. After briefly dipping below 1.1 on Monday, on Tuesday the Euro rebounded for the second consecutive day. It’s now heading in the other direction, toward the 1.1300 level. This was an impressive upward trend despite being limited by major technical hurdles which still haven’t been cleared. The performance of the Euro, which serves as the currency for 19 European Union countries in the Eurozone, remains a focal point in foreign exchange markets.
The Euro is the world’s second most traded currency after the US Dollar. The EUR/USD pair serves as a bellwether for the market, being the most-active traded currency pair. It represents about a third of all FX trades. As for the Euro, in 2022 it accounted for just 31% of all foreign exchange transactions – still quite impressive, with average daily turnover over $2.2 trillion. This makes international finance ever more critical. Most importantly, it illustrates how many distinct economic factors are weighing down on its overall valuation.
Current Market Dynamics
It was Tuesday, a significant rebound for the EUR/USD currency pair as it started to bounce back from its cycle lows. Right now, it’s still under pressure from the 1.1300 level, a major resistance level that’s got traders’ attention and focus. The bullish momentum is at a fever pitch. So far it’s mostly been that, with a rebound from the 50-day Exponential Moving Average (EMA) just under 1.1100. Analysts point out that the Euro is still in the ranks. In order to get back to the multi-year highs last seen in April, it will need to climb above 1.1500.
Market sentiment is another key factor affecting the dynamics of the EUR/USD currency pair. Another currency pair strongly impacted by the craziness in Trump trade headlines out of the USA. History would suggest that global investors are flying blind through an aisle of uncertainty. As they do, the fate of the Euro increasingly hangs on trade negotiations, including those with the Trump administration. This link demonstrates exactly how connected our global economies have become. It shows how much US economic indicators can jam up major European currencies.
Traders and investors are now looking ahead to the next round of economic data building in from the Eurozone’s largest economies. Germany, France, Italy, and Spain combined make up about 75% of the bloc’s economy, so their releases are especially important. These reports are similarly key, as they show the heartbeat of the Eurozone at this current time. Moreover, they can spur reactions in the monetary policy arena, causing an appreciation of the Euro.
Interest Rates and Economic Indicators
Eurozone interest rates are now the highest in the world. This has made the Euro a more attractive investment currency. Like clockwork, whenever there is an increase in interest rates, investors rush to Euro-denominated assets. This surge in demand raises the Euro’s value against other currencies.
Apart from interest rates, market participants are watching US economic indicators that will have the biggest influence on EUR/USD movement. Analysts are expecting a small dip in the US Manufacturing PMI for May. They see it falling from 50.2 to 50.1. At the same time, the Services component is expected to hold steady at 50.8. These numbers provide an important look into our economic reality. They can influence investor perceptions either for or against the Euro.
Farmers, producers and traders, buckle up for Wednesday! Note that there will be very little data available on either side of the Pacific Ocean. That said, mid-tier data releases are unlikely to lead to any significant volatility. Nevertheless, they will continue to determine the general market mood towards each currency.
Future Outlook for EUR/USD
EUR/USD is nearing a critical breakout point. Market observers are especially tuned into technical indicators and economic reports that would affect future movements. The current bullish bounce indicates that traders are extremely bullish on the Euro’s ability to recover and strengthen. Yet they are still hesitant due to the unknowns in the market.
Trade relations/unilateral trade policy and ECB/FED monetary policy will continue to dominate the EUR/USD outlook. It is this dynamic interplay that will set the stage for what comes next for the currency pair. A successful conclusion to trade negotiations between the U.S. and Europe would help restore confidence in the Eurozone economy. Any misses could make for even greater whipsawing.