Euro area GDP in focus as Euro rebounds from a fresh low

1.1200 in sight as EUR/USD rebounds from below its 14 October low.
December rate rise likely, says ECB President Lagarde, following unanimous decision to hold.
3.8% the previous reading as euro area awaits October inflation on Wednesday, 4 November.

EUR/USD is trading just under 1.1200. The pair is near its session high and heading for a second consecutive gain, having reversed from just above 1.1100. Its recovery has taken it from below the 14 October low to above Wednesday’s high. European Central Bank (ECB) President Lagarde said a further interest rate rise in December remains likely.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

The deposit rate was left unchanged at 2.50% by the ECB, following two increases since the Iran war drove energy prices higher. According to ECB President Lagarde, policymakers discussed a third rise before voting unanimously to hold. EUR/USD started advancing during her question-and-answer session. Money markets assign a probability of more than 80% to that increase taking place in December.

In a video released ahead of the decision, ECB President Lagarde said she would depart on 7 February, about nine months before the end of her term. The subsequent rate announcement marked EUR/USD’s session low. Goldman Sachs said the ECB would likely act in the same way regardless of who succeeds her.

0.2% growth forecast: key releases ahead

A 0.2% increase is forecast for the euro area’s initial third-quarter growth estimate, due on Friday at 10:00 GMT, following 0.6% previously. ECB Chief Economist Lane is scheduled to speak at 16:10 GMT. The October euro area inflation reading follows on 4 November at 10:00 GMT, after September’s 3.8%. Each of these three events has implications for a December rate rise.

For the US third-quarter Employment Cost Index, due on Friday at 12:30 GMT, the forecast is 0.8%, compared with 0.9% previously. On 4 November at 15:00 GMT, the Institute for Supply Management (ISM) services index will follow a prior reading of 54.9. That release falls the day after the US midterm elections. Both indicators will inform the Fed’s next policy move in December.

150 pips below the 50-day EMA

EUR/USD remains about 150 pips below its 50-day Exponential Moving Average (EMA), despite recouping roughly an eighth of the decline from the August peak in its rebound from the session low. In mid-September, the 50-day EMA moved below the 200-day EMA. The gap between the two now stands at about 1.5 cents.

EUR/USD: daily price chart

Euro: frequently asked questions

The Euro: which countries use it and how widely is it traded?

Across the 20 European Union countries that make up the Eurozone, the shared currency is the Euro. Only the US Dollar is more actively traded worldwide. The Euro represented 31% of all foreign exchange transactions in 2022, with average daily turnover exceeding $2.2 trillion. With an estimated 30% share of all transactions, EUR/USD ranks as the world’s most actively traded currency pair. Next are EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

ECB policy: what does it mean for the Euro?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and overseeing monetary policy. Maintaining price stability is its core mandate, whether through containing inflation or supporting growth. Interest rate increases and cuts are its main policy instrument. The Euro usually benefits from relatively high rates or expectations of higher rates; the reverse also holds. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national banks and six permanent members, among them ECB President Christine Lagarde.

Inflation readings: why do they matter for the Euro?

Measured by the Harmonized Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. An above-forecast increase in inflation, particularly beyond the ECB’s 2% target, requires the central bank to raise interest rates to regain control of price pressures. When interest rates are relatively high compared with those elsewhere, the Euro generally benefits. Higher rates make the region a more attractive destination for global investors’ funds.

Economic indicators: what drives the Euro’s response?

By signalling the economy’s health, data releases can move the Euro. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the indicators that can shape the single currency’s direction. Economic strength supports the Euro by attracting additional foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular weight is attached to figures from Germany, France, Italy and Spain. These are the euro area’s four largest economies and together represent 75% of the Eurozone economy.

Trade Balance: how does it affect the Euro?

The Trade Balance is another important release for the Euro. Over a specified period, it measures the gap between a country’s export earnings and its import spending. Strong overseas demand for a country’s exports generates additional demand for its currency as foreign buyers seek to purchase those goods, lifting the currency’s value. A positive net Trade Balance therefore strengthens a currency, while a negative balance has the opposite effect.