- EUR/USD rises even as Fed Minutes reflected concerns over premature interest-rate cuts.
- Eurozone, German PMI data for February suggest improving activity in the services sector, but manufacturing lags.
- The US Dollar loses ground despite expectations of higher prolonged policy rates.
- S&P US PMI data, weekly Initial Jobless Claims, and Existing Home Sales are due on Thursday.
The EUR/USD pair extends its winning streak for the seventh consecutive day on Thursday as the US Dollar (USD) weakens despite market expectations of prolonged higher interest rates by the Federal Reserve (Fed). The Federal Open Market Committee (FOMC) Minutes reflected policymakers’ concerns about early interest rate cuts, suggesting that policy easing will not begin in the upcoming monetary meetings.
In Europe, Eurozone and German Purchasing Managers Index (PMI) data posted mixed figures for February. The preliminary Eurozone and German Services PMIs rose higher than the expected figures, while Manufacturing PMIs were weaker than market expectations. Traders’ focus shifts to the United States to observe S&P Global PMI figures, weekly Initial Jobless Claims, and Existing Home Sales later in the North American session.
The US Dollar Index (DXY) declines to 103.70, with the 2-year and 10-year yields on US bonds at 4.65% and 4.31%, respectively, at the time of writing. The FOMC Meeting Minutes for January emphasized the need for additional evidence of disinflation to mitigate concerns of upside inflation risks. This cautious stance comes after hot figures from the Consumer Price Index (CPI) and Producer Price Index (PPI) from January, along with robust employment data from February.
Daily digest market movers: EUR/USD extends gains amid mixed Eurozone, Germany PMI data
- German Services PMI improved to 48.2 in February, exceeding the market expectations of 48.0 and 47.7 prior.
- German Manufacturing PMI declined to 42.3 against the expected increase to 46.1 from the previous reading of 45.5.
- HCOB German Composite PMI decreased to 46.1 from the previous reading of 47.0.
- Eurozone Services PMI rose to 50 reading in February against the expected 48.8 and 48.4 prior.
- Eurozone Manufacturing PMI decreased to 46.1 against the expected increase to 47.0 from the previous reading of 46.6.
- HCOB Eurozone composite PMI improved to 48.9 against the expected 48.5 and 47.9 prior.
- According to the German Bundesbank Monthly Report, economists at Deutsche Bundesbank anticipate a general decline in the inflation rate in the upcoming months. The earlier timing of Easter this year compared to last year is expected to influence the prices of package holidays, consequently impacting the inflation rate.
- German Buba Monthly Report projected that inflation for food and other goods will likely decrease further in the coming months. However, price pressures in the services sector are expected to ease at a slower pace, primarily due to the sustained strength in wage growth.
- According to the CME FedWatch Tool, the probability of a Federal Reserve rate cut has notably decreased to 4.5% for March and to 29.8% for May. The tool indicates a slight decrease in the likelihood of a cut in June, with a probability of 52.2%, down from 53.3% previously. The probability of a rate cut has increased for July, rising to 37.4% from the previous 33.4%.
- S&P’s analysis of the FOMC minutes suggests that inflation is expected to continue cooling in the upcoming months, despite ongoing uneven disinflationary trends. They maintain their outlook for monetary policy in 2024, expecting no changes. S&P predicts that the Federal Reserve will likely reduce its policy rate by 25 basis points at its June meeting, with further cuts totaling 75 basis points by the end of the year.
- Richmond Federal Reserve Bank President Thomas Barkin said that the United States still has “ways to go” to achieve a soft landing, Reuters reports. Barkin highlighted the overall positive trajectory of US data concerning inflation and employment. However, he noted that recent figures on the PPI and CPI have been less favorable, indicating a reliance on disinflation from goods. He suggested that the US is nearing the end of its inflation challenge, with the pressing question being the duration until resolution.
- The last Federal Reserve’s dot plot for this year suggests an anticipation of 75 basis points in rate cuts, while the Fed funds futures market is pricing in approximately 89 basis points in cuts. Additionally, ANZ anticipates that the Federal Reserve (Fed) will commence rate cuts from July 2024.
Technical Analysis: EUR/USD hovers around the major level of 1.0850
EUR/USD trades near 1.0860 on Thursday, which is positioned above the immediate support of 1.0850 followed by a 23.6% Fibonacci retracement level of 1.0842 and the nine-4hour Exponential Moving Average (EMA) at 1.0829. A break below the latter could lead the EUR/USD pair to navigate towards the support region around the 38.2% Fibonacci retracement level at 1.0814 and the psychological level of 1.0800.
The 14-hour Relative Strength Index (RSI) is above the 50 level, suggesting bullish momentum. Additionally, the Moving Average Convergence Divergence (MACD) is positioned above both the centerline and the signal line, further confirming the bullish trend.
On the upside, the EUR/USD pair tests February’s high of 1.0897, which is aligned with the psychological level of 1.0900. A breakthrough above this psychological barrier could prompt the pair to explore the area around the 1.0950 level.
EUR/USD: 4-Hour Chart
Euro price this week
The table below shows the percentage change of Euro (EUR) against listed major currencies this week. Euro was the strongest against the Japanese Yen.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.63% | -0.52% | -0.14% | -0.66% | 0.06% | -1.15% | -0.32% | |
| EUR | 0.62% | 0.13% | 0.48% | -0.03% | 0.68% | -0.51% | 0.30% | |
| GBP | 0.51% | -0.11% | 0.36% | -0.14% | 0.57% | -0.62% | 0.19% | |
| CAD | 0.15% | -0.48% | -0.36% | -0.51% | 0.21% | -0.99% | -0.17% | |
| AUD | 0.66% | 0.04% | 0.15% | 0.52% | 0.71% | -0.47% | 0.34% | |
| JPY | -0.05% | -0.69% | -0.55% | -0.21% | -0.72% | -1.21% | -0.38% | |
| NZD | 1.12% | 0.50% | 0.62% | 0.98% | 0.47% | 1.17% | 0.80% | |
| CHF | 0.35% | -0.30% | -0.19% | 0.18% | -0.32% | 0.37% | -0.81% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.