Euro strengthens slightly near 1.0600 as risk appetite improves

The Euro clings to daily gains vs. the US Dollar.
Stocks in Europe extend the multi-day decline on Monday.
EUR/USD trespasses the 1.0600 barrier as USD remains flat.
The USD Index (DXY) comes under pressure and disputes 106.00.
Eurozone flash Consumer Confidence is due in the domestic docket.
The Chicago Fed National Activity Index comes next in the US calendar.

The Euro (EUR) is extending its constructive price action against the US Dollar (USD), encouraging EUR/USD to once again break above the 1.0600 hurdle at the beginning of the week.

The Greenback, by contrast, extends the bearish move and challenges the 106.00 support when tracked by the USD Index (DXY) in a context of further improvement in the appetite for the risk complex and the resumption of the uptrend in US yields across different maturities.

In terms of monetary policy, market participants expect the Federal Reserve (Fed) to maintain its current stance of keeping interest rates unchanged at the November 1 meeting. This view was reinforced by comments from Fed Chair Jerome Powell at his appearance at the Economic Club of New York last Thursday.

At the same time, investors are contemplating the possibility of the European Central Bank (ECB) discontinuing certain policy measures. This comes despite inflation levels surpassing the bank’s target and growing concerns about the risk of a slowdown or stagflation in the Eurozone’s economy.

On another front, the speculative community increased their net longs in the EUR for the first time since mid-August despite unchanged expectations around a most-likely pause of the ECB’s tightening campaign that could extend until Q3 2024.

In the euro docket, the European Commission (EC) will publish its advanced gauge of the Consumer Confidence for the euro area for October.

In the US data space, the only release will be the Chicago Fed National Activity Index for September.

Daily digest market movers: Euro lacks conviction to advance further

The EUR extends the bounce against the USD on Monday.
US and German yields resume the upside bias.
Investors see the Fed keeping its interest rate unchanged in November.
Market expectations suggest that the ECB will also keep rates unchanged.
ECB is likely to encounter a stalemate in its interest rate hiking cycle.
Geopolitical concerns in the Middle East remain in the centre stage.

Technical Analysis: Euro intially targets the 1.0640 region

The EUR/USD keeps the consolidative mood well in place below the 1.0600 region at the beginning of the week.

If the bullish trend continues, EUR/USD may test the October 12 high of 1.0639, before moving on to the September 20 top of 1.0736 and the critical 200-day Simple Moving Average (SMA) of 1.0816. A break above this level might indicate a push to the August 30 peak of 1.0945, ahead of the psychological threshold of 1.1000. Any more advances might reintroduce a challenge of the August 10 high of 1.1064 before reaching the July 27 top of 1.1149 and potentially the 2023 peak of 1.1275 seen on July 18.

If the selling tendency returns, there is an immediate support at the low of 1.0495 from October 13 prior to the 2023 low of 1.0448 seen on October 3, all before the round level of 1.0400. If this zone is violated, the weekly lows of 1.0290 (November 30, 2022) and 1.0222 (November 21, 2022) may be retested.

It is crucial to recall that the risk of sustained negative pressure persists as long as the EUR/USD remains below the 200-day SMA.

(This story was corrected on October 23 at 08:20 GMT to say that the 1.0222 level was reached on November 21, 2022, not November 30, 2022.)

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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