EUR/USD trades above 1.1650, rebounds after losing nearly half a percentage point
- EUR/USD edges higher as the US Dollar faces challenges amid rising expectations of further Fed rate cuts.
- The pair registered nearly 0.5% losses on Thursday following stronger US economic data.
- The Euro could find support from the potential widening of the Fed-ECB interest rate differential.
EUR/USD retraces its recent losses from the previous session, trading around 1.1660 during the Asian hours on Friday. The pair appreciates as the US Dollar (USD) struggles amid rising expectations that the Federal Reserve (Fed) will cut rates in September. CME’s FedWatch tool indicates that Fed funds futures traders are now pricing in nearly a 92% chance of a 25 basis point (bps) interest rate cut at the September meeting.
However, the EUR/USD registered nearly 0.5% losses on Thursday as the US Dollar gained ground following stronger US economic data. Furthermore, the US July Retail Sales data and the preliminary Michigan Consumer Sentiment Index will be eyed later in the North American session.
The US Producer Price Index (PPI) rose 3.3% YoY in July, versus the 2.4% increase prior. This reading came in stronger than the expectations of 2.5% by a wide margin. The annual core PPI climbed 3.7% in July, compared to 2.6% in June and the 2.9% expected. US Initial Jobless Claims for the week ending August 9 fell to 224K versus 227K prior (revised from 226K). This figure was below the market consensus of 228K.
Traders expect that the European Central Bank (ECB) has ended its easing cycle in July after eight cuts over the past year, leaving borrowing costs at their lowest since November 2022. However, another rate cut by the ECB could be eyed in 2025. The Euro received support from the potential for the interest rate differential between the Fed and the ECB. The European Union (EU) economic docket will be absent as there are no scheduled events due to the Feast of Our Lady of Heaven.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.