The Euro's losing streak runs on as the Fed matches the ECB's rate hike
- EUR/USD has fallen every session since the ECB raised rates on September 10.
- Fed's projections push the return to 2% inflation out to 2029.
- Eurozone final August inflation due Thursday at 09:00 GMT, core forecast 2.4%.
The European Central Bank (ECB) raised its deposit rate to 2.50% on September 10, and the Euro has fallen every session since. The Fed raised its own rate to 3.75-4.00% on Wednesday, by the same quarter point, and the day's drop was the biggest of the run. EUR/USD is trading just above 1.1450, under both of its long-run averages, where it hasn't been since early August, and below where it was before the mid-August jump that started the last rally.
The ECB raised rates to fight inflation and its currency fell for a week
Both central banks moved a quarter point inside seven days, so the gap between the Fed's 3.875% midpoint and the ECB's 2.50% is 1.375 points, exactly what it was before either meeting. What the Fed added on Wednesday was a forecast that has US inflation not back at 2% until 2029. The ECB's own forecast has eurozone inflation at 2.5% next year. Two central banks above target for years to come, and the one paying 1.375 points less has had its currency sold every day since it tightened. Fed Chair Warsh added that the summer's inflation figures hadn't shown him any improvement, which is about as far from a signal to stop as a central banker gets.
Thursday's inflation number is a confirmation, not a release
Eurozone inflation for August is due on Thursday at 09:00 GMT, but it's the final estimate, with the core rate forecast at 2.4%, the same as the flash. Confirmations don't usually move currencies. ECB Chief Economist Lane speaks the same day at 07:00 GMT and the next ECB meeting is October 29, six weeks away, so the Euro's own central bank has nothing scheduled that could change its rate. The daily momentum gauge is at 15, its lowest since June, which is stretched enough that a bounce is likely at some point. Given the size of the last two sessions, the bounce would have to reach 1.1500 to count as anything more than a pause.
Levels and bias
Resistance: 1.1500, then the 50-day Exponential Moving Average (EMA) near 1.1550, which the pair went through on Wednesday, then 1.1600.
Support: Wednesday's low just above 1.1450, then 1.1400, then the early-August base near 1.1350.
Bias: Bearish below 1.1500. The first objective is 1.1400 and the second is the early-August base near 1.1350. The daily Stochastic Relative Strength Index (Stoch RSI), a momentum gauge, shows 15 and has been falling for two weeks, so the move is stretched and a bounce to 1.1500 wouldn't change that. A daily close above 1.1600 ends the bearish case.
EUR/USD daily chart
Euro FAQs
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%).
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.
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.
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.
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.
