- EUR/USD gains ground ahead of US inflation data scheduled for release on Wednesday.
- The US dollar weakens as Treasuries extend their decline amid increasing odds of a Fed rate cut in September.
- Traders expect the ECB to implement a 25 basis point rate cut at Thursday’s meeting.
The EUR/USD breaks its three-day losing streak, trading around 1.1050 during the Asian session on Wednesday. The EUR/USD pair’s rise is attributed to the US Dollar’s (USD) retreat ahead of the US Consumer Price Index (CPI) data scheduled to be released later in North American hours. This inflation report may offer fresh clues about the potential magnitude of the Federal Reserve’s (Fed) interest rate cut in September.
The US Dollar (USD) faces challenges as US Treasury yields continue to decline. The Dollar Index (DXY), which measures the value of the US Dollar against six other major currencies, halts its three-day winning streak. The DXY is trading around 101.40 with 2-year and 10-year US Treasury bond yields standing at 3.57% and 3.62%, respectively, at the time of writing.
However, last week’s US labor market report increased uncertainty about the likelihood of an aggressive interest rate cut by the Federal Reserve (Fed) at its September meeting. According to the CME’s FedWatch tool, markets are fully anticipating at least a 25 basis point (bp) rate cut by the Fed at its September meeting. The probability of a 50 bp rate cut has declined slightly to 31.0%, from 38.0% a week ago.
The Euro came under downward pressure from recent German inflation data. The Harmonized Index of Consumer Prices (HICP) maintained a year-on-year increase of 2.0% in August, in line with expectations. The monthly index showed a steady decline of 0.2%, also as anticipated. Similarly, the Consumer Price Index (CPI) remained stable at 1.9% year-on-year in August, meeting market expectations.
Traders expect the European Central Bank (ECB) to cut interest rates to 4.0% by implementing a 25 basis point rate cut at its next monetary policy meeting on Thursday.
Euro FAQs
The Euro is the currency of the 20 European Union countries that belong to the Eurozone. It is the second most traded currency in the world, behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), based in Frankfurt, Germany, is the reserve bank of the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main instrument is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher rates – generally benefit the Euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of the national banks of the Eurozone and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric data point for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, the ECB is forced to raise interest rates to bring inflation back under control. Relatively high interest rates compared to their peers usually benefit the euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases measure the health of the economy and can influence the Euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can 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 can encourage the ECB to raise interest rates, which will directly strengthen the Euro. Conversely, if economic data is weak, the Euro is likely to fall. Economic data from the four largest Eurozone economies (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone economy.
Another important output 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 during a given period. If a country produces highly sought-after export products, its currency will appreciate due to the additional demand created by foreign buyers who wish to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
