- EUR/USD gains ground as the ECB is expected to pause easing policy in September.
- The Euro is bolstered by improved market sentiment fueled by hopes for a potential end to the Ukraine-Russia war.
- The softening in US economic data has led traders to factor in the possibility of two rate cuts this year.
EUR/USD edges higher after registering losses in the previous session, trading around 1.1650 during the Asian hours on Monday. The pair receives support as the Euro (EUR) gains ground, driven by the prevailing expectations that the European Central Bank (ECB) will pause the easing cycle in September.
Additionally, the Euro receives support from improved market sentiment due to the possibility of the Ukraine-Russia war coming to an end. News of a possible Trump-Putin meeting next week leads some to expect a deal that could halt hostilities in Ukraine.
The EUR/USD pair also appreciates as the US Dollar (USD) struggles following the weakening US economic data, which prompted traders to price in the possibility of more interest rate cuts this year. Markets are now pricing in approximately 89% odds of a Fed rate cut at the September meeting. Traders are also pricing in a 58 bps possibility of another rate cut by the end of this year.
Fed Governor Michelle Bowman stated on Saturday that three interest rate cuts are likely to be appropriate this year. Bowman added that the apparent weakening in the labor market outweighs the risks of higher inflation to come.
Traders will likely observe the upcoming US consumer inflation figures due to be published on Tuesday, followed by the release of the preliminary UK Q2 GDP print and the US Producer Price Index (PPI) on Thursday. The key data is expected to offer meaningful momentum to spot prices and guide the next phase of the directional move.
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.
