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Can the euro gain much ground as ZEW sentiment misses forecasts?
- EUR/USD closes near the upper end of its range, just below 1.1250 and little changed from Friday.
- With inflation at 3.7%, expectations are for the ECB to leave rates at 2.50% on 29 October.
- Wednesday brings remarks from ECB President Lagarde, ahead of Friday's euro area PMI releases.
EUR/USD finished Tuesday just below 1.1250, broadly unchanged from Friday's close, despite a much weaker-than-forecast ZEW economic sentiment reading. After climbing from around 1.1200 to a little above 1.1250, the pair recorded its fifth daily high above that level this month.
A softer euro area growth outlook weakens the case for further European Central Bank (ECB) rate increases: October's ZEW reading dropped to 18.5 from 25.8, well below the 24.2 forecast. Higher ECB interest rates provide support for the Euro against a Fed that continues to raise its own rates.
Markets expect the ECB's deposit rate to remain at 2.50% on 29 October. In Danske Bank's view, a further increase in December would take it to a peak of 2.75%, still almost a percentage point below September's inflation rate of 3.7%.
Which events are on the calendar?
Wednesday's ECB speakers include chief economist Lane, Bundesbank President Nagel and Executive Board member Cipollone, before President Lagarde delivers remarks at 16:30 GMT. On Thursday, Bank of Italy Governor Panetta is scheduled to speak at 12:15 GMT. Friday's focus turns to Hamburg Commercial Bank's October Purchasing Managers Index (PMI) figures, due at 08:00 GMT, with forecasts of 52.8 for both manufacturing and services.
US jobless claims, due on Thursday at 12:30 GMT, are expected to rise to 200K from 199K. S&P Global's US PMIs follow on Friday at 13:45 GMT, less than six hours after the euro area releases, putting data from both sides of EUR/USD on the same day's calendar.
What do the charts indicate?
Since 2 October, EUR/USD has remained within a band running from a little above 1.1100 to just below 1.1300, touching its low on 14 October. Above this range sit the 50-day Exponential Moving Average (EMA), just below 1.1400, and the 200-day EMA, near 1.1500. The pair has stayed below both averages since mid-September.
EUR/USD: daily price chart
Euro: frequently asked questions
Used by the 20 European Union countries that form the Eurozone, the Euro ranks second only to the US Dollar among the world's most traded currencies. Its share of all foreign exchange transactions stood at 31% in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world's most actively traded currency pair. Next are EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
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 central mandate, requiring either measures to contain inflation or support for growth. Interest rate increases and cuts are its main policy instruments. The Euro generally benefits from relatively high rates, or expectations that rates will rise; 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.
Measured through the Harmonized Index of Consumer Prices (HICP), Eurozone inflation is a key economic gauge for the Euro. An increase beyond expectations, particularly above the ECB's 2% target, requires the central bank to raise interest rates to regain control over inflation. When the region's interest rates are relatively high compared with those of its counterparts, global investors generally find it a more attractive destination for their money, supporting the Euro.
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 drawing in 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, the euro area's four largest economies, together represent 75% of the Eurozone economy. Their economic releases therefore carry particular significance.
The Trade Balance is another key release for the Euro, showing the difference between a country's export earnings and its import spending over a specified period. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers seek to purchase those goods, lifting the currency's value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.
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