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Investors Eye Central Bank Policies as Euro Recovers from Early Session Weakness

By:
James Hyerczyk
Published: Apr 3, 2023, 13:48 UTC

Euro faces uncertainty as investors weigh diverging central bank policies as Euro Zone factory activity falls.

EUR/USD

In this article:

Highlights

  • Euro rebounds after initial sell-off due to U.S. Dollar surge
  • OPEC+’s production cut raises oil prices, causing higher inflation fears
  • Investors weigh ECB’s expected rate hikes and potential Fed cuts

Overview

After experiencing initial weakness, the Euro has bounced back dramatically and is now trading higher. The earlier sell-off was caused by a surge in the U.S. Dollar, as traders bought the greenback with the expectation of the Federal Reserve implementing more assertive rate hikes.

At 14:00 GMT, the EUR/USD is trading 1.0869, up 0.0026 or +0.24%. On Friday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $100.15, down $0.60 or -0.60%.

This move was in response to OPEC+’s unexpected decision to reduce production, which sent crude oil prices soaring by more than 8%. The increased oil prices are likely to lead to higher inflation, which has raised concerns that the Fed may have to raise rates more than once this year as widely expected in May to combat the anticipated surge in inflation.

Euro Investors Focusing on Diverging Central Bank Policies

The Euro initially fell against the US Dollar on Monday due to concerns over the impact of oil production cuts on inflation before recovering enough to turn positive.

However, investors are now focusing on the diverging central bank policies, with expectations for further rate hikes from the European Central Bank (ECB) and possibly rate cuts from the US Federal Reserve later this year.

Traders are pricing in 60 basis points of tightening from the ECB by year-end, compared to 15 basis points from the Fed, with expectations of a 70% probability of a Fed rate hike in May but a 40 basis point cut by year-end.

Euro Zone Factory Activity Falls Due to Rising Living Costs

A survey conducted by S&P Global showed that struggling factories across the euro zone experienced a further decline in activity last month, as consumers cut back due to rising living costs.

The final manufacturing Purchasing Managers’ Index (PMI) fell to 47.3 in March, marking the first time manufacturing costs have fallen since mid-2020.

However, the output index rose to a 10-month high of 50.4, suggesting some improvement in economic health. S&P Global’s chief business economist,

Chris Williamson, noted that euro zone manufacturing remains in trouble due to falling demand for goods for the eleventh straight month, along with tighter monetary policy, inventory destocking, and subdued customer confidence.

Daily EUR/USD

Daily EUR/USD Technical Analysis

The main trend is up according to the daily swing chart. A trade through 1.0930 will signal a resumption of the uptrend. A trade through 1.0517 will change the main trend to down.

The minor trend is also up. A trade through 1.0713 will change the minor trend to down. This would shift momentum to the downside.

The EUR/USD is currently trading on the strong side of a short-term pivot at 1.0821, making it support. On the upside, the closest resistance is a long-term 50% level at 1.0943.

Daily EUR/USD Technical Forecast

Trader reaction to the minor pivot at 1.0821 is likely to determine the direction of the EUR/USD on Monday.

Bullish Scenario

A sustained move over 1.0821 will indicate the presence of buyers. If this creates enough upside momentum, we could see a drive into a resistance cluster at 1.0930 – 1.0943. Taking out the latter could trigger an acceleration to the upside.

Bearish Scenario

A sustained move under 1.0821 will signal the presence of sellers. This could trigger an acceleration to the downside with support coming in at 1.0713, followed by 1.0661.

For a look at all of today’s economic events, check out our economic calendar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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