Euro shifts its attention to 1.0600 prior to key German data

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  • The Euro reverses the recent downside against the US Dollar.
  • European stocks trade with decent gains so far on Monday.
  • Germany’s flash Q3 GDP Growth Rate surprises to the upside.

The Euro (EUR) leaves behind the initial pessimism against the US Dollar (USD), encouraging EUR/USD to climb to daily highs and revisit the proximity of the key barrier at 1.0600 the figure in the wake of the opening bell in Europe on Monday. The sudden bounce in the single currency comes in response to unexpected auspicious results from advanced GDP figures in Germany for the July-September period.

In the interim, the Greenback comes under some downside pressure and relaxes to the 106.40 zone, when gauged by the USD Index (DXY). The modest loss of momentum of the index comes in contrast to a languid climb in US yields across diverse timeframes.

Within the realm of monetary policy, a growing consensus has materialized amongst market participants that the Federal Reserve (Fed) will preserve its present stance of retaining interest rates unchanged at the upcoming meeting on November 1. The potential remains, however, for a potential shift in rates in December, a view that seems well reinforced by the resilience of the US economy and still elevated inflation levels.

Regarding the European Central Bank (ECB), no surprises arose at its event on October 26 following a unanimous decision to keep its interest rates unchanged. President Christine Lagarde reiterated once more that work remains to be done to bring inflation back to target, while it is anticipated that inflation will remain too elevated for too long. Adding a bearish undertone to the meeting, Lagarde acknowledged that risks to the economic outlook appear skewed to the downside.

From the speculative community’s viewpoint, net longs in the single currency increased to four-week highs in the week ended on October 24, according to the CFTC report. The period coincides with some consolidation in the pair against the backdrop of persistent resilience of the US economy and rising cautiousness prior to the ECB event.

Busy day in the euro calendar, as Germany’s advanced figures for the Q3 GDP Growth Rate showed the economy is expected to contract 0.1% QoQ and 0.3% YoY, while preliminary Inflation Rate for the month of October is due later. In the broader Eurozone, final Consumer Confidence came in at -17.9, Economic Sentiment receded to 93.3 and Industrial Sentiment worsened to -9.3, all prints for the month of October.

Daily digest market movers: Euro and the hunt for 1.0600

  • The EUR attempts a decent comeback vs. the USD.
  • US and German yields attempt a tepid bounce at the beginning of the week.
  • There is still scope for the Fed to raise rates in December.
  • The ECB is seen extending its pause until H2 2024.
  • ECB's Simkus sees a soft landing of the region's economy.
  • ECB's Kazimir suggests the ECB must keep its current restrictive stance for many quarters.
  • The Middle East conflict threatens to extend to other regions.
  • Investors continue to factor in further FX intervention around USD/JPY.
  • Retail Sales in Australia expanded more than expected in September.
  • Preliminary Inflation Rate in Spain came in at 3.5% YoY in October.

Technical Analysis: Euro appears supported by the 1.0500 region

EUR/USD picks up some upside traction and shifts its focus to the 1.0600 hurdle on Monday.

In case sellers push harder, EUR/USD could revisit the weekly low of 1.0495 (October 13), ahead of the lowest level in 2023 at 1.0448 (October 15), and the round number of 1.0400.

On the upside, the immediate short-term target for the pair emerges at the October high of 1.0694 (October 24), a level that appears reinforced by the proximity of the temporary 55-day Simple Moving Average (SMA) at 1.0673. Further up comes the weekly top of 1.0767 (September 12) before the key 200-day SMA at 1.0810, and another weekly high of 1.0945 (August 30), all ahead of the psychological level of 1.1000. Beyond this zone, the pair might face resistance at the August top at 1.1064 (August 10), prior to the weekly peak of 1.1149 (July 27) and the 2023 high at 1.1275 (July 18).

The pair’s outlook is expected to remain negative while below the critical 200-day SMA.

(This story was corrected on October 30 at 11:03 GMT to say that the USD Index (DXY) lost momentum instead of strengthened)

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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