EUR/USD holds above 1.1600, seven pips above where Monday opened. The pair has had three chances to move over four sessions and has taken none of them. Both central banks are priced to raise rates this month for the same energy shock, and a rate gap that is not moving does not move a currency.
Three catalysts and seven pips
Friday’s US Nonfarm Payrolls (NFP) printed 162K against a 53K consensus, and September hike odds for the Federal Reserve went to 58% from 49.4%. EUR/USD lost roughly 40 pips to just beneath 1.1600 on the 12:30 GMT release and had the whole move back by the New York afternoon.
Sunday delivered the first outright win for a far-right party in a German state since the war. The Alternative for Germany (AfD) took 43.9% in Saxony-Anhalt and 39 of the 83 seats, three short of a majority, while the chancellor’s Christian Democrats fell to 17.2% from 37.1% in 2021. The 10-year Bund yield rose a single basis point on Monday and the Euro’s entire session covered 28 pips.
Monday’s Eurozone releases landed at 08:30 GMT and 09:00 GMT. Second-quarter growth was revised up to 0.6% against a 0.4% consensus and the Sentix investor survey jumped to 5.1 from 0.9. EUR/USD spiked to a high short of 1.1650 and was back where it started inside the hour.
Unanimity is not information
The European Central Bank (ECB) announces at 12:15 GMT on Thursday and is expected to lift the deposit rate to 2.5% and the main refinancing rate to 2.65%. All 65 economists in the Reuters survey taken between August 31 and September 3 expect exactly that, up from 83% of them in August. A decision nobody disputes cannot move a price.
The level it arrives at is no more interesting. A 2.5% deposit rate is the top of the range most estimates put at neutral, between 1.75% and 2.5%, so Thursday completes the journey and stops. Anything past it is a choice to restrict demand rather than to contain a price shock, and the Federal Reserve is being repriced for the same barrel of Crude Oil at the other end.
The market and the forecasters cannot both be right
The argument is not about Thursday. It is about whether the 2% deposit rate the ECB left behind in June was the floor of a short defensive move or the base of a cycle. Interest rate futures price a third increase to 2.75%. The economists in that same survey do not, and the July minutes record some Governing Council members wanting a move into mildly restrictive territory.
The Council has reasons to keep its options open. Its own research this month argued that the energy shock has not fed into non-energy inflation the way it did in 2022, which is the case for stopping at neutral. Monday’s growth beat came from trade, which added 0.9 percentage points to the quarter, so the number arguing for restriction is the one a stronger Euro would erode.
Berlin supplies another reason. The governing coalition lost a state on Sunday and faces two more votes on September 20, with Oxford Economics flagging the risk that political stalemate derails reform and drags German potential growth lower. Tightening into that is a harder sell in December than it is this week.
Everything arrives inside 26 hours
Rates and the statement come at 12:15 GMT Thursday and the press conference at 12:45 GMT, with the United States Producer Price Index (PPI) printing between them at 12:30 GMT, seen at 0.4% on the month after a flat July and 5.3% YoY after 4.7%. The ECB President speaks again at 14:00 GMT Friday and on Saturday morning.
Friday belongs to the Dollar leg. The Consumer Price Index (CPI) at 12:30 GMT is seen at 0.4% on the month after 0.1%, with the annual rate steady at 3.4% and the core measure easing to 2.4%. It is the last inflation print before the Federal Reserve meets September 15-16 with a quarter point priced near 58%.
A soft American number and a hint from Frankfurt that neutral is not the destination takes EUR/USD through 1.1700. A hot number and no guidance sends it back to the moving averages. Everything the pair has declined to do for three weeks is scheduled for two consecutive lunchtimes.
Levels and bias
Resistance: The 1.1650 area caps the range and Monday’s high stopped short of it again. Above that, the late-August peak just under 1.1700 defines the whole three-week range, and a daily close through it opens 1.1750 and then the May highs in the 1.1800 area.
Support: The 1.1600 handle held through Monday, and Friday’s payrolls low sat just beneath it without closing there. Under it the 50-day and 200-day Exponential Moving Averages (EMA) sit within eight pips of each other just above 1.1550, which puts the entire downside case in one place. Beneath them 1.1500 is the next round figure, with the early-August base below that.
Bias: Bearish while 1.1650 caps, with the EMA cluster just above 1.1550 the objective. The daily Stochastic Relative Strength Index (Stoch RSI) has fallen from above 85 to 46 in four sessions while price held its range, which is momentum leaving without price following it yet, and the intraday reading has faded to 26 from the afternoon push. The scheduled risk points the same way: the curve is priced for more tightening than any surveyed economist expects, and Friday’s inflation consensus is hot enough to restore the Fed hike. A daily close above 1.1650 invalidates the call and puts 1.1700 back in play.
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.
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