- EUR/USD has recovered after an early sell-off due to news of an escalation in the conflict in the Middle East.
- Israel purportedly launched drones at Iran in retaliation for its April 13 attack.
- EUR/USD is consolidating in a downtrend.
EUR/USD is trading in the mid 1.0600s at the time of writing, after recovering from an early bout of weakness. News reports of an escalation in the Middle East conflict had prompted a flight to the safe-haven US Dollar (USD), with a resulting decline in EUR/USD.
Overnight, reports of explosions in the Iranian city of Isfahan, which houses a military barracks, according to Reuters, suggested Israel has retaliated against Iran for its April 13 drone attack. The escalation had a direct impact on markets, with demand for safe-havens assets – Gold, CHF, JPY and USD – ratcheting up.
EUR/USD, which measures the number of US Dollars that can be bought with one Euro, fell back down to 1.0610 on the news, close to the 1.0601 April 16 year-to-date (YTD) low. Since then the exchange rate has recovered a bit, and is currently exchanging hands in the 1.0630s.
EUR/USD started Thursday bullishly after the President of the European Central Bank (ECB) Christine Lagarde stated “The game (of fighting inflation) is not over,” suggesting perhaps some doubt as to whether it was time to start cutting interest rates. Given the maintenance of higher interest rates is positive for a currency since it attracts greater inflows of foreign capital, the Euro (EUR) strengthened following her remarks.
EUR/USD reversed course after touching technical resistance just shy of 1.0700 and resumed its short-term downtrend as a roll-call of other ECB officials expressed the opposite view, i.e that cutting interest rates was necessary if not overdue.
The President of the Banque de France and ECB governing council member François Villeroy de Galhau, for example, stated that a cut to borrowing costs was due, and delaying could be detrimental to growth, placing the ECB “behind the curve”.
Vice-President of the ECB Luis de Guindos was more tempered, saying the central bank would reduce rates if the data evolved as expected. ECB governing council member Joachim Nagel said a June rate cut appeared increasingly likely, although certain inflation data remained higher than expected.
EUR/USD’s reversal lower on Thursday gained momentum after the release of the Philadelphia Fed Manufacturing Survey’s Index Prices Paid component – a regional inflation metric – shot up unexpectedly to 23.00 (prior 3.7), suggesting price pressures remain alive and kicking.
Flat Initial Jobless Claims further reinforced the view that the US labor market is likely to continue to be a source of inflation.
Commentary from Federal Reserve rate-setters suggested a shift to an increasingly hawkish stance (meaning in favor of high interest rates for longer).
Atlanta Fed President Raphael Bostic said US inflation is returning to the Fed’s 2.0% target at a slower pace than many had anticipated, adding he’d be comfortable being patient, and that interest rate cuts are likely – but not until year end.
New York Fed President John Williams went further, saying he didn’t feel an urgency to cut interest rates and that monetary policy is in a good place.
EUR/USD seems to be messing around in the gap between the YTD lows at 1.0601 and the resistance from the last major swing low in February at just shy of 1.0700.
The short and medium-term trends are bearish, suggesting more weakness will eventually come.
The Relative Strength Index (RSI) has exited oversold conditions, indicating renewed potential for more downside.
A break below the 1.0601 April lows would post a lower low and give renewed confidence to bears. After that, the next concrete target is at 1.0446, the October 2023 low.
Resistance at around 1.0700 will need to be overcome for bulls to reappear. In the case of a really bullish move, the April 2 swing low at 1.0725 provides the next upside target followed by 1.0800, where a cluster of major Moving Averages coils.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.