The euro found some respite on Friday against its counterpart, the US dollar, which enjoyed a short-lived, just two-day rally, but on Friday pared Thursday’s gains, as reflected by the US dollar index (DXY). The risk-on impulse weighed on the dollar’s appeal as a sheltered haven, while the ECB’s serene monetary policy decision on Thursday had investors paying attention to market sentiment. The EUR/USD rate is 1.1817, an enhance of 0.34%.
Euro is paring losses near 1.1820 as dollar strength fades and steady ECB announcements stabilize the pair
The common currency will end the week with losses, but it seems that EUR/USD will be ready to consolidate in the area of 1.1750-1.1830. US economic data showed that consumer sentiment improved in February, although this did not contribute to the strengthening of the US dollar.
Thursday’s tender labor market data fueled speculation that the Federal Reserve could cut interest rates more than twice this year. During Friday’s session, money markets priced in an easing of 62 basis points, before retreating to 54 basis points, according to data. Main Square Terminal data.
Meanwhile, Fed speakers spoke: Raphael Bostic was hawkish, Mary Daly took a neutral tone, and Vice Chairman Philip Jefferson’s speech revealed that a stable labor market reduces the risk of inflation.
On the other side of the ocean, the situation was clear, and yet industrial production data in Germany were worse than expected in December. Meanwhile, European Central Bank (ECB) policymakers went above and beyond but echoed part of ECB President Lagarde’s speech in which she indicated they were not worried about EUR/USD volatility, particularly the strength of the euro. In fact, she said that the euro had been “fluctuating within a certain range…” since the summer and that the ECB had “concluded that the impact of the exchange rate appreciation since last year is included in our baseline.”
Next week the calendar will be busy on both sides of the Atlantic, dominated by speeches from the ECB and the Fed. However, the main event will be the January non-farm payrolls report, retail sales and the Consumer Price Index (CPI), both in the US.
Daily market moves: Euro shrugs off Fed officials’ comments, surges
- Raphael Bostic, an Atlanta Fed member, said it was significant to keep interest rates at levels that curb economic activity and bring inflation back to 2%.
- San Francisco Fed President Mary Daly said policymakers must balance both sides of the Fed’s dual mandate. Meanwhile, Fed Vice Chairman Philip Jefferson said he was “cautiously optimistic” about the economy, adding that current monetary policy is “well-positioned” to deal with what is likely to come.
- A decline in job openings, an enhance in layoffs highlighted by the Challenger report, and a rise in jobless claims have reinforced expectations that the Federal Reserve will begin cutting interest rates in 2026.
- At the same time, the University of Michigan’s consumer sentiment index for February improved to 57.3 from 56.4, topping forecasts of 55. One-year inflation expectations fell to 3.5% from 4.0%, while the five-year outlook rose slightly to 3.4% from 3.3%.
- German industrial production fell sharply in December, falling 1.9% month-on-month, according to data released Friday by the federal statistics office. The decline was much larger than the 0.3% decline expected by economists.
Technical analysis: EUR/USD will remain in the range of 1.1750-1.1830
The technical picture shows that EUR/USD is neutral or biased to the downside, after registering a series of lower highs and lower lows, but stable. Sales momentum is weakening, as shown by the relative strength index (RSI).
To sustain a bullish continuation, buyers need to reclaim the February 4 intraday high of 1.1837. Breaking the latter will reveal the 1.1900 level. On the other hand, if EUR/USD falls below the January 20 highest support at 1.1769, further losses await us. The next key support is 1.1700, but once it is broken, the euro’s decline could reach 1.1600.
Frequently asked questions about the euro
The euro is the currency of the 20 European Union countries belonging to the euro zone. It is the second most widely traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with average daily turnover exceeding $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% discount on all trades, 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 euro area. The ECB sets interest rates and manages monetary policy. The ECB’s primary task is to maintain price stability, which means controlling inflation or stimulating economic growth. Its basic tool is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – will usually benefit the euro and vice versa. The Governing Council of the ECB takes decisions on monetary policy at meetings held eight times a year. Decisions are made by the heads of the euro zone’s national banks and six lasting members, including ECB President Christine Lagarde.
Inflation data in the euro area, measured by the Harmonized Index of Consumer Prices (HICP), is an significant econometric indicator for the euro. If inflation rises more than expected, especially above the ECB’s target of 2%, this obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to interest rates will typically benefit the euro as they make the region more attractive as a place to park money for global investors.
The published data are used to assess the condition of the economy and may affect the euro. Indicators such as GDP, PMIs for industry and services, employment and consumer sentiment surveys may influence the direction of the common currency. A sturdy economy is good for the euro. Not only will it attract more foreign investment, but it may prompt the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is tender, the euro will likely fall. The economic data for the four largest eurozone economies (Germany, France, Italy and Spain) is particularly significant as they constitute 75% of the eurozone economy.
The next significant data release for the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what the country spends on imports over a given period. If a country produces a highly sought after export, its currency will only appreciate in value due to the additional demand generated by foreign buyers wanting to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa in the case of a negative balance.
