The euro started the penultimate day of January on a positive note, balancing against the US dollar at 1.09. This level represents a key barrier for the pair, and its success in reaching this level marks a recovery from two consecutive days of losses.
The EUR/USD exchange rate improvement comes as traders and investors prepare for several key economic indicators to be released in the first week of February. These indicators are expected to impact the currency markets significantly and could influence the euro’s direction against the dollar in the coming days.
EUR/USD Exchange Rate Technical Analysis
The EUR/USD exchange rate is rising by 0.16% and is at 1.0881, with the next level of resistance being at 1.0930, a high from January 26, 2023. Suppose the exchange rate can surpass this level. In that case, it could reach the weekly high of 1.0935, and the possibility of reaching 1.1 in the coming week depends on the interest rate decisions made by the Federal Reserve (FED) and the European Central Bank (ECB).
However, if the exchange rate fell below 1.077, a week low from January 16, it could result in a downward trend, potentially breaking the 55-day average of 1.0604. If this were to occur, it could continue to decline to 1.0479, a monthly low in January.
The value of the EUR/USD exchange rate is directly influenced by interest rate decisions made by the FED and ECB. Higher interest rates make a stronger currency as investors seek out higher-yielding investments. In contrast, lower interest rates can result in a weaker currency as investors look for better returns elsewhere.
Expected Rate Hikes
The Federal Open Market Committee will hold its meeting on February 1, expecting a 0.25% interest rate hike. At the same time, analysts predict the European Central Bank to raise rates by 0.5%. Therefore, investors will closely monitor these central banks to determine investor sentiment in the face of contractionary monetary policy messages.
The potential rate hikes by the FOMC and ECB will have a major impact on the financial markets. While it signals a strong and growing economy, the increase in borrowing costs and the possibility of slowing growth has caused some investors concern.
As the FOMC meeting draws near, the markets are closely watching for the outcome and its impact on the economy. The actions of the FOMC will provide insight into the direction of monetary policy and the subsequent effect on the financial markets and the global economy.
Impact on Businesses and Consumers
The potential interest rate hikes by the FOMC and ECB will significantly impact businesses and consumers. For businesses, higher borrowing costs could lead to reduced investment and slower growth, affecting their bottom line. For consumers, higher interest rates will increase the cost of borrowing, making it more expensive to take out loans such as mortgages, personal loans, and credit cards.
Impact on Other Markets
The interest rate decisions made by the FOMC and ECB will also impact other financial markets, including the stock market and bonds. For example, the stock market may experience a decline as higher interest rates could lead to a decrease in consumer spending, reducing demand for goods and services. Conversely, bonds may benefit as investors flock to these safer investments in the face of uncertainty in the stock market.