Euro softens below 1.1350 on Lagarde's dovish tilt, German Retail Sales data in focus
- EUR/USD edges lower to near 1.3335 in Wednesday’s early Asian session.
- ECB’s Lagarde leaned against market bets for an October rate hike.
- Markets currently see a 68% odds of a Fed rate hike in October.
The EUR/USD pair declines to around 1.3335 during the early Asian trading hours on Wednesday. The Euro (EUR) softens against the US Dollar (USD) after European Central Bank (ECB) President Christine Lagarde's dovish tilt. Germany’s August Retail Sales data is due later on Wednesday.
ECB’s Lagarde said on Tuesday that rising bond yields will curb economic expansion and limit the transfer of elevated energy costs to inflation. She added that the central bank should adopt a “measured response as appropriate to keep inflation in check” with second-round effects so far absent.
Traders pared monetary-tightening bets and now see a less than 40% chance of a hike by the ECB in the October policy meeting, according to Bloomberg.
"Her remarks confirm our suspicion that if one central bank hikes in October, it will be the Fed, and not the ECB," says Francesco Pesole, FX Strategist at ING.
Across the pond, the heightened expectations for more Federal Reserve (Fed) rate hikes are keeping the Greenback up. Traders will closely monitor the release of the US jobs data for September on Friday.
Economists expect the US Nonfarm Payrolls (NFP) to show an increase of 90,000 job additions in September, while the Unemployment Rate is projected to remain unchanged at 4.1%.
Markets are now pricing in nearly a 68% probability of a Fed rate hike in October and a 95% chance of an increase in December, according to the CME's FedWatch Tool.
Euro holds firm as ECB tones down October hike expectations
Analysts at ING note that the Euro “held up relatively well yesterday considering the slew of dovish-leaning comments by ECB President Lagarde,” even as those remarks “favoured a widening in the SOFR-ESTR 2yr swap to beyond 155bp.” They highlight that the spread is “now not far from the 163bp max width reached in early July,” underscoring how rate differentials have moved further in favour of the US.
According to ING, Lagarde “seemed willing to tone down some market enthusiasm about an October hike,” arguing that “tight financial conditions are limiting the pass-through of energy costs to the broader economy.” She also “stressed that the ECB should adopt a ‘measured response’ given no evidence of second-round effects,” reinforcing the impression of a more cautious policy stance.
ING writes that her remarks “confirm our suspicion that if one central bank hikes in October, it will be the Fed, and not the ECB,” with current market “pricing… now 17bp and 9bp, respectively.” Even so, the bank’s macro team “thinks both will wait until December, hence our baseline view for a higher EUR/USD by year-end.”
Technical Analysis: EUR/USD retains a negative outlook under the 100-day SMA
In the daily chart, EUR/USD maintains a bearish near-term bias as spot holds beneath the 100-day simple moving average (SMA) and the Bollinger Bands 20-period middle SMA. Price is pressed toward the lower end of the recent range, with the Bollinger lower band offering the nearest technical floor, while the Relative Strength Index (14) at 23.7 sits in oversold territory, hinting that downside momentum is stretched but not yet reversed.
On the topside, initial resistance appears at the Bollinger 20-period middle SMA around 1.1500, followed by the 100-day SMA near 1.1520, with the upper Bollinger band further up, near 1.1705, reinforcing a wider supply zone should a corrective bounce unfold. On the downside, immediate support is aligned with the Bollinger lower band at 1.1290; a decisive break below this level would open the door to additional losses, while holding above it would keep the pair in a oversold consolidation under heavy overhead resistance.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
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%).
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.
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.
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.
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.