- EUR/USD is rising as the US Dollar struggles due to growing expectations of a Fed interest rate cut in 2024.
- The U.S. ISM Services PMI fell to 48.8 in June, the biggest drop since April 2020.
- The euro could be volatile as the second round of the French election approaches this Sunday.
EUR/USD continued its winning streak, trading around 1.0790 in the Asian session on Thursday. The rise was driven by a weakening of the US Dollar (USD) due to growing speculation that the Federal Reserve (Fed) will cut interest rates in 2024. US markets are closed on Thursday for Independence Day.
The US Dollar Index (DXY), which compares the U.S. dollar to six other major currencies, has been struggling with the decline in U.S. Treasury yields. At the time of writing, the DXY was trading around 105.30. As of Wednesday’s close, the two-year and 10-year U.S. Treasury yields were at 4.70% and 4.35%, respectively.
In U.S. data, the U.S. ISM Services PMI fell sharply to 48.8 in June, the biggest drop since April 2020. The figure followed a reading of 53.8 in May and was well below market expectations of 52.5. The ADP Employment Report showed that U.S. private employers added 150,000 employees in June, the lowest increase in five months. The figure was below the 160,000 expected and below the downwardly revised 157,000 in May.
Meanwhile, traders are expecting more volatility in the euro as the second round of the French election nears on July 7. The RN is projected to fall short of the 289 seats needed to control the 577-seat National Assembly, according to a Harris Interactive poll conducted for Challenges magazine, the first published since the cross-party anti-RN coalition was formed, Reuters reports.
The gap between French and German 10-year government bond yields has narrowed to about 71 basis points from a recent peak of 82 basis points late last month. This fall in the risk premium for French government bonds signals growing investor confidence that the far-right RN party will not be able to secure a parliamentary majority.
Frequently asked questions about the Euro
The euro is the currency of 20 European Union countries that belong to the eurozone. It is the second most traded currency in the world after the US dollar. In 2022, Accounted for With 31% of all foreign exchange trading and an average daily volume of over $2.2 trillion, EUR/USD is the most traded currency pair in the world. accounting All trades are off around 30% followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mission is to maintain price stability, which means either keeping inflation down or stimulating growth. The ECB’s main tool is to raise or lower interest rates. Relatively higher interest rates, or the expectation of rising interest rates, typically benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight meetings per year. Decisions are made by the heads of the eurozone national banks and the 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 input for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s target of 2%, the ECB will be forced to raise interest rates to keep inflation in check. Relatively high interest rates compared to other countries are usually in favor of the euro, as it makes the eurozone a more attractive place for global investors to park their funds.
Data released measures the health of the economy and can affect 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, it can also trigger the ECB to raise interest rates, which directly strengthens the euro. On the other hand, weak economic data can cause the euro to weaken. Economic data from the eurozone’s four largest economies (Germany, France, Italy, and Spain) is particularly important as they account for 75% of the eurozone’s economy.
Another important piece of data about the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces exports that are in high demand, its currency will only increase in value due to the additional demand it generates from foreign buyers looking to purchase these goods. So a positive trade balance makes a currency stronger, and a negative one makes it stronger.
