EUR/USD: Euro Falters Against Dollar Amidst Mixed Signals, Economic Data

Highlights

• Euro weakens due to mixed signals and economic data.
• Investors closely monitor Fed’s actions and comments.
• Uncertainty surrounding interest rates impacts Euro’s performance.

Overview

The Euro started the day on a positive note against the U.S. Dollar but eventually surrendered its gains, influenced by a series of mixed signals and economic data. Initially, the greenback weakened as unexpectedly soft U.S. services data raised expectations of a rate pause at the upcoming Federal Reserve meeting, yet it clouded the policy outlook for the months ahead. However, the Euro gave up its earlier advances following weaker-than-expected German Factory Orders and Euro Zone retail sales figures.

Volatility Surge Fueled by Fed Uncertainty

Euro traders have been closely monitoring the Federal Reserve’s actions and comments, which have introduced volatility into the currency market. Last week, the EUR/USD received a boost from suggestions by Fed officials that they might skip a rate hike in June. However, robust employment numbers on Friday renewed bets for a rate hike in July. The recent weak outcome in the services sector has further clouded the outlook for interest rates.

Market Awaits Fed’s June Decision

Looking ahead, the Federal Open Market Committee (FOMC) is set to determine its policy on June 14. Market expectations have significantly shifted, with a sharp jump to a 77% chance of the Fed maintaining its current stance, compared to a 36% chance just a week earlier, according to the CME FedWatch tool. With no major U.S. data scheduled for the remainder of the week and Fed officials in a “blackout” period, it appears that the dollar is in a holding pattern leading up to the FOMC meeting.

Euro Struggles Amid Rate Uncertainty

The uncertainty surrounding future tightening measures has impacted the Euro’s performance. German industrial orders unexpectedly fell in April, fueling speculation that the tightening cycle might come to an end. Hawkish comments from Dutch central bank chief Klaas Knot emphasized the need for cautious rate hikes, while Bundesbank President Joachim Nagel expressed the view that several more rate hikes may be necessary to combat inflation, leaving uncertainty as to whether rates could peak this summer.

Eurozone Retail Sales Remain Stagnant

Eurozone retail sales in April showed no growth. There was a decrease in spending on food and car fuel but an increase in purchases of other products, especially online. Retail sales volumes for the 20 nations using the euro currency remained the same as in March. They also recorded a year-on-year decrease of 2.6%, which differed from economists’ predictions of a 0.2% monthly increase and a 3.0% decline compared to the previous year. This information comes from a Reuters poll.

Investors Cautious Ahead of Policy Meetings

Policy meetings are approaching on both sides of the Atlantic. Investors are expected to stay on the sidelines. The main focus will be on whether the Federal Reserve will pause its tightening cycle. There are indications that the U.S. central bank might end its streak of 10 consecutive rate increases. However, it remains open to making future adjustments in borrowing costs. In the euro area, there is a consensus about two rate hikes in June and July. Market participants will closely watch President Christine Lagarde’s post-meeting remarks. They want to determine if she reiterates the notion of “more ground to cover.”

Euro’s Retreat Reflects Fed Uncertainty

In conclusion, the Euro’s retreat against the U.S. Dollar reflects the uncertainty surrounding the Federal Reserve’s monetary policy outlook. Mixed economic signals, including weaker German Factory Orders and Eurozone retail sales, have contributed to this complexity. Investors are eagerly awaiting the upcoming FOMC meeting and paying close attention to comments from central bank officials as they seek clarity on the future direction of interest rates.

Technical Analysis

The EUR/USD is trading lower on Tuesday after reversing earlier gains. It remains on the bearish side of 1.0807 (PIVOT), which indicates sellers are still in control

The inability to overcome 1.0807 (PIVOT) suggests traders are selling rallies. This could keep the downside pressure on the market with 1.0522 (S1) the next support target.

With the  trend down, sellers are likely to come in on the first test of 1.0807 (PIVOT). However, overtaking it will indicate strong counter-trend buying with 1.0979 (R1) the next target.

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