EUR/USD ticks lower despite uncertainty over US-China trade
- EUR/USD faces slight pressure above 1.1400 as the US Dollar steadies, with investors seeking clarity on the US-China trade outlook.
- US Treasury Secretary Bessent has put the responsibility for the US-China trade progress on Beijing.
- ECB officials support the need for more interest rate cuts.
EUR/USD edges lower to near 1.1400 during European trading hours on Tuesday. The major currency pair ticks lower as the US Dollar (USD) steadies, but remains broadly on edge amid escalating uncertainty about the trade outlook between the United States (US) and China. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks up to near 99.20 but trades inside Monday’s trading range.
The comments from US Treasury Secretary Scott Bessent that China should be the one to initiate trade talks with the US have increased investors’ doubts about whether trade discussions are underway. “I believe that it’s up to China to de-escalate, because they sell five times more to us than we sell to them, Bessent said in an interview on CNBC’s Squawk Box on Monday.
Meanwhile, contradictory statements from US President Donald Trump and Beijing about Chinese President Xi Jinping calling Trump to discuss terms and conditions on trade have also diminished hopes of a resolution of the US-China trade war in the near term.
Donald Trump has been insisting that China’s Xi has called him several times to discuss bilateral trade since the imposition of higher tariffs on Beijing. However, the Chinese Foreign Ministry continues to deny any economic and trade discussions between Trump and Xi.
Apart from comments from the White House on US-China trade talks, a slew of US economic data will influence action in the US Dollar this week. Investors will pay close attention to the preliminary Q1 Gross Domestic Product (GDP), ISM Purchasing Managers’ Index (PMI), ADP Employment Change and Nonfarm Payrolls (NFP) data for April, and Personal Consumption Expenditure Price Index (PCE) data for March, which will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
In Tuesday’s American session, investors will focus on the US JOLTS Job Openings data for March, which is expected to show that employers posted 7.5 million job offers, marginally lower than 7.56 million seen in February.
Daily digest market movers: EUR/USD drops as Euro trades with caution
- A mild downside move in the EUR/USD pair is also driven by a slight selling pressure in the Euro (EUR), with European Central Bank (ECB) officials expressing the need for more interest rate cuts. On Monday, ECB policymaker and Finnish central bank governor Olli Rehn supported the need for further monetary policy expansion and expressed concerns about deepening risks to Eurozone inflation undershooting the central bank’s target of 2% in the face of Trump’s tariffs
- Rehn didn’t rule out the possibility of interest rates sliding below the neutral rate. "We must analyse all options with an open mind and not a priori rule out rate cuts below the neutral rate,” Rehn said at an event, Reuters reported.
- Separately, ECB official and Governor of the Bank of France François Villeroy de Galhau also emphasized the need for more interest rate cuts amid fears that Trump’s tariff policy could lead to an economic slowdown. “We still have room to lower interest rates," Villeroy de Galhau said after expressing confidence that inflation will return to the 2% target in a radio interview on Monday, Reuters reported.
- For more cues on the ECB’s monetary policy outlook, investors look to the Eurozone’s flash Q1 GDP and the Harmonized Index of Consumer Prices (HICP) data for April, which will be released on Wednesday and Friday, respectively.
- Meanwhile, Spain's GDP data for the January-March period has come in weaker than expected. The economy rose by 0.6% in the first quarter, missing expectations of 0.7% and the prior release of 0.8%. The Spain HICP data grew steadily by 2.2% year-on-year in April. On month, the inflation data rose at a moderate pace of 0.6%, compared to 0.7% growth seen in March.
Technical Analysis: EUR/USD slips to near 1.1400
EUR/USD trades lower around 1.1400 in Tuesday’s European session. The outlook of the major currency pair remains bullish as the 20-week Exponential Moving Average (EMA) is sloping higher around 1.0890.
The 14-week Relative Strength Index (RSI) climbs to overbought levels above 70.00 in the weekly chart, which indicates a strong bullish momentum, but chances of some correction cannot be ruled out.
Looking up, the psychological level of 1.1500 will be the major resistance for the pair. Conversely, the July 2023 high of 1.1276 will be a key support for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 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.