Euro bounces off lows near 1.0500 amidst improved risk appetite

The Euro trades with decent gains vs. the US Dollar.
Stocks in Europe kick off the week mostly on the defensive.
EUR/USD meets decent contention around 1.0500 so far.
The USD Index (DXY) looks supported around the mid-105.00s.
Germany Wholesale Prices rose 0.2% MoM in September.
US NY Empire State Manufacturing Index takes centre stage later.

The Euro (EUR) starts the new trading week on a positive foot against the US Dollar (USD), encouraging EUR/USD to extend the rebound from the 1.0500 neighbourhood and regain the 1.0540 zone so far on Monday.

In the meantime, the Greenback, sheds some ground following last week’s tops near 106.80 when measured by the USD Index (DXY) against the backdrop of an improved context in the risk-associated universe, while the background of the Fed’s tighter-for-longer stance appears unchanged for the time being.

Continuing to focus on monetary policy, investors are currently anticipating that the Federal Reserve (Fed) will maintain its stance of not making any adjustments to interest rates throughout the remainder of the year. At the same time, those in the financial markets are pondering the possibility of the European Central Bank (ECB) putting a halt to policy modifications, even though inflation levels exceed the bank's target and concerns are growing regarding the potential for a future economic downturn or stagflation in the European region.

On another front, the speculative community kept trimming their net long positions during the week ended on October 10, this time reaching levels last seen in late October 2022, as market participants continued to factor in the likelihood that the ECB’s hiking cycle might have reached a peak vs. the persistent view that the Fed could maintain its restrictive stance for a longer period than initially anticipated.

On the domestic calendar, Wholesale Prices in Germany rose 0.2% MoM in September and contracted 4.1% over the last twelve months. Later in the session, Balance of Trade results are due for the broader euro bloc.

In the US, the regional manufacturing gauge tracked by the NY Empire State Index is due along with September’s Monthly Budget Statement.

Daily digest market movers: Euro regains the smile above 1.0500

The EUR picks up fresh upside traction vs. the USD.
US and German yields start the week with humble gains so far.
Markets anticipate that the Fed will keep rates unchanged.
Investors expect the ECB will extend the pause in its rate rise campaign.
Geopolitical tensions in the Middle East remain high.
The PBoC keeps its One-Year LPR unchanged at 2.50%.

Technical Analysis: Euro meets decent contention around 1.0500

EUR/USD leaves behind part of the recent two-day lows and manages to gather fresh steam beyond 1.0500 the figure on Monday.

If the upward momentum continues, there is a possibility that EUR/USD could revisit the weekly high of 1.0736 (September 20) and potentially reach the significant 200-day SMA at 1.0822. Breaking above this level may lead to testing the weekly peak at 1.0945 (August 30) and approaching the psychological threshold of 1.1000. Further breakthroughs beyond the August high of 1.1064 (August 10) could potentially push the pair towards the weekly top at 1.1149 (July 27) and even reach the 2023 peak of 1.1275 (July 18).

On the other hand, if selling pressure resumes, there is a possibility of retesting the 2023 low at 1.0448 (October 3) and potentially challenging the significant psychological level of 1.0400. If this level is breached, it could pave the way for a retest of the weekly lows at 1.0290 (November 30, 2022) and 1.0222 (November 21, 2022).

It is important to note that as long as the EUR/USD remains below the 200-day SMA, there is a potential for sustained downward pressure.

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.