The EUR/USD has fallen to its weakest level in three months, reaching around the 1.0700 handle, due to strong U.S. economic data increasing the probability of additional FOMC policy firming in 2023. This has reinforced the case for a restrictive monetary policy position for an extended period and propelled U.S. Treasury yields upwards, with the 2-year yield breaking above the 5.0% threshold.
The bearish momentum may drive the exchange rate towards 1.06810, the 50% Fibonacci retracement of the September 2023 low. In the event of further weakness, a pullback towards the psychological 1.06585 level cannot be ruled out. The EUR/USD pair is expected to continue its bearish trend, with a trading range for today between 1.07035 support and 1.07314 resistance.
In the past month, factors affecting the EUR/USD include strong U.S. economic data, higher odds of additional Fed tightening in 2023, and rising U.S. Treasury yields. Additionally, the European Central Bank’s hawkish rhetoric has allowed the Euro to outperform its rivals, but the technical outlook points to overbought conditions in the near term.
In the month several factors have influenced the EUR/USD currency pair:
- Strong economic data, from the United States has bolstered the U.S. Dollar resulting in a decline in EUR/USD. This includes figures related to inflation, job market and trade.
- The likelihood of tightening by the Federal Reserve in 2023 has increased, strengthening the U.S. Dollar. Both the European Central Bank (ECB) and the Fed have emphasized their commitment to addressing inflation indicating interest rate hikes.
- Anticipation of a Fed rate hike has caused U.S. Treasury yields to rise providing support for the U.S. Dollar.
- The ECBs hawkish rhetoric has enabled the Euro to outperform currencies; however technical analysis suggests that overbought conditions may be observed in the term.
- Key economic indicators in one or more Eurozone countries or the USA can significantly impact each currency’s value, such, as GDP or consumer price index.
To sum it up the EUR/USD exchange rate has been influenced by a mix of factors including data from the United States in anticipation of further tightening in Federal Reserve policies increased yields on U.S. Treasury bonds the European Central Banks hawkish language, political events and economic performance indicators both in the Eurozone and the United States. All these elements have played a role in driving down the value of the EUR/USD currency pair throughout the month.
Strong U.S. Economic data
During the months of August and September, in 2023 several significant economic data releases originating from the United States have played a role in strengthening the U.S. Dollar and contributing to a trend in the EUR/USD currency pair.
- Employment Situation: In August 2023 there was an addition of 187,000 jobs to the U.S. Labor market but however, the unemployment rate saw an increase from 3.5% in July to 3.8%. These numbers depict an outlook for the economy with job creation being positive while simultaneously witnessing a rise in unemployment.
- Inflation: Consumer spending in the United States experienced its increase over a six-month period in July with an uptick of 0.8%. However, during that month there was a modest rise of 0.2% in the Personal Consumption Expenditures (PCE) price index—an outcome consistent with June’s growth rate. This data suggests that inflation is decelerating, potentially influencing interest rate decisions made by the Federal Reserve.
- Trade: According to reports released by both the U.S. Bureau of Economic Analysis and the U.S Census Bureau there was an increase observed in the trade deficit for July 2023 within Americas borders. This particular data release possesses influence on both the value of the U.S dollar and consequently impacts on currency pairings such, as EUR/USD.
- The economy of the United States: Experts from the Federal Reserve are likely to revise their growth projection for 2023 upwards due to reports on consumer spending, residential investment and other economic indicators. In fact, an unofficial estimate from the Atlanta Fed suggests that the US economy could expand at an annualized rate of 5.6% in the quarter.
- The Institute for Supply Management (ISM) recently reported that their manufacturing Purchasing Managers Index for August 2023 surpassed expectations by reaching 54.5 compared to the predicted 52.5. This release of data indicates a growth trend in the services sector of the US economy which could further bolster the value of the US dollar.
These recent economic data releases have contributed to a strengthening of the US dollar and a bearish trend in the EUR/USD currency pair. The positive economic data from the United States has increased the likelihood of policy adjustments by FOMC in 2023 supporting a stance towards monetary policies for an extended period and leading to upward movement in yields, on US Treasury bonds.
Central Bank Policies
In the month there has been an increasing anticipation of the Federal Reserve implementing policy adjustments in 2023 resulting in a stronger U.S. Dollar. Both the European Central Bank (ECB) and the Fed have emphasized their commitment, to addressing inflation concerns indicating that more interest rate hikes are on the horizon. During the past month, both the Fed and ECB have taken measures to tackle inflation worries and maintain stability in the economy.
- Federal Reserve: In July 2023 the Federal Reserve approved an increase in interest rates bringing borrowing costs to their level in over 22 years. Fed Chairman Jerome Powell mentioned that they would proceed cautiously when deciding whether to continue tightening or keep rates steady while awaiting data. The minutes from the July meeting of the Federal Open Market Committee revealed that most members recognized risks of rising inflation, which might necessitate adjustments to monetary policy.
- European Central Bank: In July 2023 for a time consecutively the ECB raised interest rates pushing its main rate to 3.75%. The central bank stated that they still expected inflation levels to remain persistently high and would base their actions on economic indicators such, as inflation figures and employment statistics. In August 2023 the deposit rate set by the ECB was, at 3.75%, which had risen from 0.5% in July 2022. This increase represents one of the series of rate hikes since the introduction of the euro.
The recent actions taken by both the Fed and the ECB demonstrate their dedication to addressing concerns about inflation and ensuring stability. Consequently, there is a growing anticipation for tightening of policies in 2023 resulting in a value for the U.S. Dollar and impacting the exchange rate, between EUR and USD.
US Treasury Yields:
Over the past few months, U.S. Treasury yields have experienced an upward surge, primarily driven by the anticipation of a Federal Reserve rate hike, which has consequently bolstered the U.S. dollar. Several interrelated factors have fueled this increase in Treasury yields. Firstly, a consistent stream of robust economic indicators, including the U.S. jobs report and the ISM services report, has heightened expectations of a more resilient economy, thereby pushing yields higher. Secondly, persistent concerns about inflation have prompted the Federal Reserve to consider interest rate hikes as a measure to counter rising prices, prompting investors to seek higher returns to hedge against inflation risks, consequently elevating Treasury yields. Thirdly, the escalation in government debt issuance, a response to the growing demand for government funding, has placed upward pressure on yields as investors seek greater compensation to absorb the surplus supply of bonds.
Additionally, financial markets have been factoring in an increased probability of a pause in the Fed’s rate hike cycle in September 2023, though uncertainty prevails regarding the central bank’s future actions, contributing to the rise in Treasury yields as investors assess the potential for further rate hikes. Finally, global dynamics, such as escalating oil prices, have stirred market apprehensions, with some investors fearing that heightened energy costs could pose challenges to equities outperforming Treasury yields. These multifaceted factors have collectively fueled the surge in U.S. Treasury yields observed in August and September 2023, thereby reinforcing the U.S. dollar’s position and exerting an impact on the EUR/USD currency pair.
ECB’s Hawkish Stance
During the months of August and September 2023 the Euro has experienced a rise compared to global currencies. This surge can be attributed to the European Central Banks (ECB) assertive language regarding policies. However, upon examination of the outlook there are indications of potential overbought conditions, in the short-term suggesting a possible correction may be on the horizon. The ECBs hawkish stance is supported by factors. Firstly, there are concerns about inflation within the Eurozone as inflation rates consistently exceed the bank’s target. To address these mounting price pressures the ECB has adopted an approach by implementing interest rate hikes. Secondly there have been improvements in GDP growth and employment figures within the Eurozone indicating signs of recovery. This positive outlook has instilled confidence in the ECB regarding prospects and consequently contributed to their more assertive monetary policy approach. Thirdly as part of their efforts towards policy normalization the ECB is gradually phasing out measures like easing and negative interest rates that were implemented during times of uncertainty. This gradual withdrawal has further reinforced their position overall. Additionally effective communication from the ECB regarding its intentions and providing forward guidance on policy actions has solidified its stance. Provided support for continued strength, in Euro currency. However even though the Euro has been performing well lately technical indicators indicate that there might be an overextension. This could lead to a correction, in the term which may have an impact on the EUR/USD currency pair and potentially cause a shift, in the trend.
Significant Economic Performance Indicators
The economic performance indicators play a role, in determining the fortunes of the Eurozone and the United States which has an impact on the value of their respective currencies especially when it comes to the EUR/USD currency pair. In the Eurozone there was a resurgence in GDP growth during the quarter of 2023 surpassing expectations and indicating an overall recovery in the regional economy. However, this growth was not evenly distributed as Germanys economy remained stagnant during the period. Additionally, inflation rates in the Eurozone reached 5.3% in August 2023 due to factors like inflation and rising energy costs further influenced by rate hikes implemented by the European Central Bank that had an impact on economic dynamics within the region.
On the other hand, in comparison to Europe’s performance economic expansion in the United States was more moderate with real GDP growing at a rate of 2.1% during Q2 of 2023. This indicates positive progress for their economy. Contributes to fluctuations in the value of the U.S. Dollar. There were encouraging signs from indicators like consumer price index (CPI) in sectors such as new and used cars, new residential leases and even within “Super Core CPI ” offering some relief when it comes to prices, for consumers. These important economic measures are crucial, for evaluating the health of both regions and their fluctuations have an impact, on the EUR/USD currency pair. Investors and policymakers closely monitor these indicators to make informed choices regarding policy and investment plans, which shape the continuous movements of this significant currency pair.
In summary the EUR/USD currency pair has been influenced by a combination of factors that have played out over the months. The strong economic data, in the United States along with expectations of adjustments in Federal Reserve policies have contributed to a strengthened U.S. Dollar and a corresponding decline in the EUR/USD exchange rate. On the hand the European Central Banks cautious approach, driven by concerns over inflation and positive economic indicators within the Eurozone has helped support the performance of the Euro. However there is some concern about conditions. Furthermore various economic indicators in both regions have also had an impact on fluctuations in the EUR/USD exchange rate. Factors such as GDP growth and inflation rates have played a role, in shaping this relationship. These multifaceted dynamics highlight how intertwined data central bank decisions and currency performance are. Therefore it is no surprise that investors and policymakers alike closely monitor developments surrounding the EUR/USD pair.
Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.