EUR/USD bounces back amid uncertainty over upcoming US-China trade talks
- EUR/USD recovers above 1.1250 as the US Dollar retreats from almost a month's high..
- Investors focus on the US-China trade talks on Saturday, with US Lutnick saying he is confident of a de-escalation in the Sino-US trade war.
- ECB Rehn says that the Eurozone’s disinflation trend is intact and the economic outlook is grim.
EUR/USD rebounds to near 1.1260 during European trading hours on Friday from over a three-week low around 1.1200 earlier in the day. The major currency pair bounces back as the US Dollar (USD) retraces amid caution ahead of the trade talks between the United States (US) and China due on Saturday.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, corrects to near 100.40 from almost a month high of 100.85 posted earlier in the day.
Investors will pay close attention to the US-China trade discussions in Switzerland on Saturday. China is the second largest market of US imports after Mexico, according to the US COMTRADE database on international trade. Additionally, the trade war between Washington and Beijing is the key trigger behind downward revisions in global economic growth, given the labor cost competitive advantage of China.
The White House has expressed confidence that the tariff war between the US and China will de-escalate after the meeting. “De-escalation and bringing rates down are the goal for China,” US Commerce Secretary Howard Lutnick said in an interview with CNBC on Thursday. Lutnick also demonstrated confidence that Washington will “roll out more deals over the next month”. His comments came after the announcement of the US-United Kingdom (UK) trade deal.
Meanwhile, The New York Post reported that US President Donald Trump could lower tariffs on China to the range between 50% and 54% as early as next week. However, White House spokesperson Kush Desai has not confirmed.
Daily digest market movers: EUR/USD gains as Euro outperforms
- The recovery move in the EUR/USD pair is also driven by the Euro’s (EUR) outperformance against its peers on Friday. The Euro advances despite European Central Bank (ECB) officials showing confidence that inflation is on track to return to the central bank’s target of 2%, and concerns over the economic outlook.
- “Disinflation is on track and the growth outlook is weakening, in case this is going to be confirmed in our June forecast, then in my view in order to achieve our 2% symmetric inflation target over the medium term, the right reaction in monetary policy is to cut rates,” ECB policymaker and Finnish central bank governor Olli Rehn said during European trading hours, Bloomberg reported. Generally, the Euro underperforms when ECB officials favor monetary policy expansion.
- Meanwhile, investors await the response from the US regarding the tariff countermeasures announced by the European Union (EU) Commission on Thursday. During European trading hours, ECB Governing Council member Gediminas Šimkus said that “Eurozone inflation depends on EU retaliation to the US.”
- On Thursday, the European Commission launched a public consultation paper that contains possible countermeasures in response to US tariffs. The paper showed countermeasures on up to €95 billion of US imports if trade talks fail to deliver a satisfactory result for the bloc, which is a little short of €100 billion reported by Bloomberg on Tuesday.
Technical Analysis: EUR/USD finds support near 20-day EMA
EUR/USD continues to find bids near the 20-day Exponential Moving Average (EMA) around 1.1250.
The 14-day Relative Strength Index (RSI) remains inside the 40.00-60.00 range, indicating that the bullish momentum is concluded for now. However, the upside bias still prevails.
Looking up, the psychological level of 1.1500 will be the major resistance for the pair. Conversely, the April 3 high of 1.1145 will be a key support for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 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.