EUR/USD comes under pressure ahead of Fed speakers, US inflation

• EUR/USD remains edgy as investors await a slew of Fed speakers for fresh interest rate guidance.
• The Euro weakens as Trump’s policies are expected to weigh on the Eurozone’s exports.
• This week, investors will focus on the US inflation data for October.

EUR/USD trades cautiously near more than four-month low around 1.0700 in Monday’s European session. The major currency pair remains on tenterhooks as the election of Republican Donald Trump as US President has strengthened the US Dollar’s (USD) outlook in the long run. The US Dollar Index (DXY), which gauges Greenback’s value against six major currencies, edges higher to near 105.00.

Trump vowed to raise import tariffs and lower taxes in his election campaign, which would add to United States (US) inflationary pressures and boost debt levels. According to a November 6-7 Reuters poll, 62% of respondents – including 94% of Democrats and 34% of Republicans – said that Trump's policies likely "will push the US national debt higher."

Trump's tax cut proposals could add $7.5 trillion to the nation's debt over the next decade, according to the nonpartisan Committee for a Responsible Federal Budget.

This week, investors will pay close attention to speeches from a slew of Federal Reserve (Fed) officials to get fresh cues about the likely monetary policy action in December. According to the CME FedWatch tool, there is a 65% chance that the central bank will cut interest rates again by 25 basis points (bps) to 4.25%-4.50% in December. This would be the second quarter-to-a-percent interest rate cut by the Fed in a row, as it also reduced its key borrowing rates last week.

On the economic front, investors will focus on the US Consumer Price Index (CPI) data for October, which will be published on Thursday. The impact of the inflation data is expected to be nominal on the interest rate outlook as Fed officials are confident about the disinflation trend towards the bank’s target of 2%. However, a significant deviation from the consensus could impact the same.

Daily digest market movers: EUR/USD is under pressure amid Euro’s weak outlook

• EUR/USD remains on tenterhooks as the Euro’s (EUR) outlook is uncertain due to expectations of a global trade war after Trump’s victory in the US presidential election. In the election campaign, Trump warned that the European bloc would have to pay a big price for not buying enough American exports.
• The impact of Trump’s victory is noticeable on European economic leaders. Speaking at the European Union (EU) Summit on Friday, former European Central Bank (ECB) President Mario Draghi said, "The sense of urgency today is greater than it was a week ago," Reuters reported.
• Domestic problems in the Eurozone’s major members have also weakened the Euro’s appeal. The collapse of the German three-party coalition has come at a time when the economy is going through a rough phase. The nation managed to dodge a technical recession after expanding surprisingly by 0.2% quarterly in Q3, according to data released by the Federal Statistics Office of Germany on October 30. However, political uncertainty could lead to postponement of government spending and investments.
• Meanwhile, investors look for fresh cues about the ECB’s likely interest rate action in the December meeting. ECB policymaker and head of Austrian National Bank Robert Holzmann said there is no reason for the central bank to not cut interest rates next month at current point of time, however, the decision will be based on the economic data, which will be available in December.

Technical Analysis: EUR/USD remains lower near 1.0700

EUR/USD trades in a tight range near the more than four-month low around 1.0700. The near-term trend of the major currency pair remains bearish as the 20-day and 50-day Exponential Moving Averages (EMAs) near 1.0840 and 1.0910, respectively, continue to decline.

The 14-day Relative Strength Index (RSI) wobbles near 40.00. A bearish momentum would resume if the RSI (14) slides below that level.

The upward-sloping trendline around 1.0800, plotted from the April 16 low at around 1.0600, will act as a key resistance zone for Euro (EUR) bulls. Looking down, the shared currency pair could decline to the year-to-date (YTD) low of 1.0600.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 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.