ZEW Sentiment Misses Forecast, Euro Gains Remain Limited

Just below 1.1250, EUR/USD closes near Friday's level and the upper end of its range.
2.50% is the expected ECB rate for October 29, against inflation of 3.7%.
Wednesday brings remarks from ECB President Lagarde, ahead of Friday's euro area PMIs.

EUR/USD closed Tuesday just below 1.1250. That was broadly unchanged from Friday, as ZEW economic sentiment came in well below expectations. The pair climbed from around 1.1200 to slightly above 1.1250, marking the fifth daily high above that level this month.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

October's ZEW reading dropped from 25.8 to 18.5, missing the 24.2 forecast. Further European Central Bank (ECB) rate increases are harder to justify with euro area growth prospects weakening. Higher ECB rates remain a source of support for the Euro against a Fed that continues to raise its own rates.

An unchanged deposit rate of 2.50% is expected from the ECB on October 29. Danske Bank forecasts a final increase in December, taking the rate to a peak of 2.75%. Even then, the deposit rate would remain almost a point below September's inflation rate of 3.7%.

Economic calendar: ECB speakers and PMIs

At 16:30 GMT on Wednesday, ECB President Lagarde is due to speak. ECB chief economist Lane, Bundesbank President Nagel and ECB Executive Board member Cipollone speak earlier that day. Thursday's speakers include Bank of Italy Governor Panetta at 12:15 GMT. On Friday at 08:00 GMT, Hamburg Commercial Bank releases its October Purchasing Managers Index (PMI) readings. Both manufacturing and services are forecast at 52.8.

US jobless claims, due Thursday at 12:30 GMT, are expected to rise from 199K to 200K. Friday's US PMIs from S&P Global follow at 13:45 GMT, less than six hours after the euro area releases. Both sides of EUR/USD therefore publish their readings on the same day.

1.1100–1.1300: EUR/USD's trading range

Since October 2, EUR/USD's trading range has extended from slightly above 1.1100 to just below 1.1300. The low was recorded on October 14. Above this range sit the 50-day Exponential Moving Average (EMA), just below 1.1400, and the 200-day EMA, near 1.1500. The pair has remained beneath both averages since mid-September.

EUR/USD: daily price chart

Euro: key questions answered

The Euro: currency and trading profile

Across the 20 European Union countries in the Eurozone, the Euro serves as the common currency. Only the US Dollar is traded more heavily worldwide. The Euro represented 31% of all foreign exchange transactions in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world's most actively traded currency pair. Next are EUR/JPY at 4%, EUR/GBP at 3% and EUR/AUD at 2%.

The ECB's role in the Euro's value

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank. Interest-rate setting and monetary policy management fall within its remit. Maintaining price stability is the ECB's central mandate, whether through containing inflation or supporting growth. Raising or cutting interest rates is its main policy instrument. The Euro generally benefits from relatively high rates or expectations of higher rates; the reverse also applies. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of Eurozone national banks and six permanent members, among them ECB President Christine Lagarde.

Inflation's effect on the Euro

Measured through the Harmonized Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. An above-forecast rise in inflation, particularly beyond the ECB's 2% target, requires the central bank to increase interest rates to regain control of price pressures. When the region's rates are relatively high compared with those elsewhere, the Euro usually benefits. Higher rates make the region a more attractive destination for global investors' funds.

Economic indicators and the Euro

By signalling the economy's health, data releases can affect the Euro. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can each shape the single currency's direction. Economic strength supports the Euro by drawing in more foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic figures, by contrast, are likely to weigh on the Euro. Particular weight is attached to data from Germany, France, Italy and Spain. Together, the euro area's four largest economies represent 75% of the Eurozone economy.

Trade Balance and the Euro

The Trade Balance is another important release for the Euro. Over a specified period, it captures the gap between a country's export earnings and its spending on imports. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers seek to purchase those goods. That demand alone lifts the currency's value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.

ZEW Sentiment Misses Forecast, Euro Gains Remain Limited

Economic calendar: ECB speakers and PMIs

1.1100–1.1300: EUR/USD's trading range

EUR/USD: daily price chart