• The Euro remains flat above 1.0845 with the broader bearish trend intact.
• The strong US data seen this week has dampened hopes of Fed cuts, boosting the US Dollar. 
• ECB President Lagarde discards rate cuts before next summer, which has provided some support to the Euro.

The Euro (EUR) is trading within a tight range, unable to put a significant distance from the one-month lows at 1.0845 on Friday’s European trading session. The strong US macroeconomic data seen this week have forced investors to reassess their interest rate expectations, which has boosted the US Dollar across the board.

Data released on Thursday revealed that US initial jobless claims declined against expectations in the week of January 12. These figures confirm the picture of a resilient US economy shown by the strong Retail Sales seen earlier this week and suggest that the Federal Reserve (Fed) has still some work to do to bring inflation to the target level.

On the calendar today, European Central Bank (ECB) President Christine Lagarde will speak for the last time before the two-week blackout ahead of January’s monetary policy meeting.

In the US, the Michigan Consumer Sentiment Index and the University of Michigan Consumer Inflation expectations will focus the attention. Somewhat Later San Francisco Fed President, Mary Daly, might give some more info about the bank’s monetary policy outlook. 

Daily digest market movers: Euro hovers near one-month lows, weighed by USD strength

• The Euro is hesitating above the 1.0845 support area as the US Dollar strengthens with investors scaling back hopes of Fed cuts.
   
• US Jobless claims eased to 187K in the week of January 12, down from 203K in the previous week and against expectations of an increase to 207K.
   
• US Unemployment levels corroborate the resilience of the US economy pouring more cold water on investor’s hopes of Fed cuts in March.
   
• The ECB monetary policy accounts released on Thursday reflect the policymakers’ conviction that inflation is subsiding, however, rate cuts are still off the table.
   
• ECB President Lagarde affirmed at the Davos World Economic Summit that the bank will not cut rates until next summer.
   
• Atlanta Fed President, Raphael Bostic does not see interest rate cuts coming until the third quarter.
   
• The CME Group FedWatch Tool shows a 55% chance of rate cuts in March, down from 75% last week.

Technical Analysis: EUR/USD remains biased lower with 1.0845 support holding bears for now

The EUR/USD remains practically flat on Friday and is on track for a 0.6% decline this week. The near-term bias is negative and the support level at 1.0845 is keeping the pair from further decline.

A clear break below 1.0845 would activate a bearish Head and Shoulders (H&S) pattern increasing negative pressure towards 1.0800 and 1.0725. The H&S measured target is the 78.6% Fibonacci retracement of the late 2023 rally, at 1.0600.

On the upside, Euro bulls are likely to meet a significant resistance at the 1.0920/30 area, where previous trendline support meets the confluence of the 4-hour 200 and 50 SMAs. Above here, the next target is 1.1000.

EURO FAQS

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.

INTEREST RATES FAQS

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.