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Euro rebounds from a fresh low as euro area GDP comes into focus
- After slipping beneath its 14 October low, EUR/USD recovers to just below 1.1200.
- Following a unanimous decision to leave rates unchanged, ECB President Lagarde signals a likely December increase.
- October's euro area inflation reading is scheduled for Wednesday, 4 November, following 3.8% previously.
A further December rate rise remains likely, according to European Central Bank (ECB) President Lagarde, as EUR/USD recovers from below its 14 October low to exceed Wednesday's high. Having fallen to just above 1.1100, the pair reversed course and now trades just below 1.1200. It is close to its session high and heading for a second consecutive advance.
At 2.50%, the ECB's deposit rate was left unchanged following two increases since the Iran war drove energy prices higher. According to ECB President Lagarde, policymakers considered a third rise before unanimously opting to hold. EUR/USD started to recover during her question-and-answer session, while money markets priced in a probability above 80% of that increase taking place in December.
In a video released ahead of the decision, ECB President Lagarde announced that she would depart on 7 February, roughly nine months before her term expires. The subsequent rate announcement marked EUR/USD's session low. Goldman Sachs said the ECB would probably act in the same way regardless of who succeeds her.
Growth and inflation releases shape the December outlook
Growth of 0.2%, following 0.6%, is forecast for the euro area's first third-quarter estimate, due on Friday at 10:00 GMT. ECB Chief Economist Lane is then scheduled to speak at 16:10 GMT. The euro area's October inflation reading follows at 10:00 GMT on 4 November, after September's 3.8%. Each of these three events has a bearing on the December rate increase.
An increase of 0.8%, following 0.9%, is expected in the US Employment Cost Index for the third quarter, due on Friday at 12:30 GMT. After a previous reading of 54.9, the Institute for Supply Management (ISM) services index is scheduled for 15:00 GMT on 4 November, the day after the US midterm elections. Both releases will inform the Fed's next decision in December.
EUR/USD recovers but remains below its moving averages
About an eighth of the decline from August's peak has been retraced in the rebound from the session low. Nevertheless, EUR/USD remains roughly 150 pips below its 50-day Exponential Moving Average (EMA). Since the 50-day average crossed below the 200-day average in mid-September, the gap between them stands at around 1.5 cents.
Daily price chart for EUR/USD
Euro questions and answers
Used by the 20 European Union countries within the Eurozone, the euro ranks behind only the US dollar among the world's most actively traded currencies. Its share of all foreign exchange transactions reached 31% in 2022, with daily turnover averaging more than $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world's most actively traded currency pair. Next come EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
Based in Frankfurt, Germany, the European Central Bank (ECB) acts as the Eurozone's reserve bank, setting interest rates and overseeing monetary policy. Maintaining price stability is its principal mandate, whether through controlling inflation or stimulating growth. Interest rate increases and reductions are its main policy instrument. The euro generally benefits when rates are relatively high, or expected to rise; the reverse also applies. Monetary policy is determined by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone's national central banks and six permanent members, among them ECB President Christine Lagarde.
Measured using the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the euro. A larger-than-expected increase in inflation, particularly above the ECB's 2% target, requires the central bank to raise interest rates to regain control of price pressures. When the region's interest rates are relatively high compared with those elsewhere, global investors tend to find it a more attractive destination for their money. This usually supports the euro.
By measuring the economy's health, data releases can affect the euro. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys are among the indicators that can steer the single currency. 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. Germany, France, Italy and Spain together represent 75% of the Eurozone economy. Releases from these four largest euro area economies therefore carry particular significance.
The trade balance is another important release for the euro, showing the gap between a country's export earnings and its expenditure on imports over a specified period. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers purchase those goods, increasing its value. A positive net trade balance therefore strengthens a currency, while a negative balance has the opposite effect.
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