EUR/USD defends 1.1550-40 support as USD consolidates post-FOMC gains, lacks follow-through

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EUR/USD edges higher on Friday as the USD consolidates the post-FOMC gains.
The Fed’s hawkish tilt could underpin the USD bulls and cap gains for the major.
ECB’s on-hold decision and uncertain outlook warrant caution for the EUR bulls.

The EUR/USD pair attracts some dip-buyers during the Asian session on Friday and, for now, seems to have snapped a two-day losing streak back closer to the monthly low, around the 1.1550-1.1540 horizontal support. Spot prices, however, lack bullish conviction and currently trade around the 1.1575 region, up less than 0.10% for the day.

The US Dollar (USD) consolidates its strong gains registered over the past two days, to highest level since early August set on Thursday, and turns out to be a key factor acting as a tailwind for the EUR/USD pair. Any meaningful USD depreciation now seems elusive in the wake of the US Federal Reserve's (Fed) hawkish tilt. In fact, Fed Chair Jerome Powell pushed back against market expectations for another interest rate cut in December, which, along with reviving safe-haven demand, should help limit deeper USD losses.

The European Central Bank (ECB), on the other hand, held its key deposit facility rate steady at 2% for the third consecutive time on Thursday and said that inflation remains close to the 2% medium-term target. The ECB, however, warned that the Eurozone's economic outlook remains uncertain amid global trade disputes and geopolitical tensions. Moreover, policymakers are divided on future rate cuts, which, in turn, might hold back traders from placing aggressive bullish bets around the Euro (EUR) and cap the EUR/USD pair.

Hence, it will be prudent to wait for some follow-through buying before positioning for a further intraday move higher. On the other hand, a sustained break below the 1.1550-1.1540 strong horizontal support will be seen as a fresh trigger for bearish traders and pave the way for deeper losses. Nevertheless, the EUR/USD pair seems poised to register losses for the second consecutive week and remains at the mercy of the USD price dynamics. Hence, speeches from influential FOMC members should provide a fresh impetus later this Friday.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.