- In early European trading on Tuesday, the EUR/USD pair was trading in negative territory for the second consecutive day at around 1.0490.
- Growing concerns about the possible collapse of the French government are weakening the euro.
- US manufacturing PMI in November exceeded expectations.
EUR/USD fell to around 1.0490 in early European time on Tuesday. The euro (EUR) weakened against the US dollar as France's budget standoff heightened concerns about the eurozone's second-largest economy.
Opposition parties have announced their intention to vote in favor of a no-confidence motion against French Prime Minister Michel Barnier after he plans to pass a social security bill without a vote in parliament. The move is likely to lead to the collapse of the French government this week.
Political uncertainty in France is putting some selling pressure on the common currency. Meanwhile, the yield spread between France and Germany's 10-year government bonds rose 7.6 basis points (bp) to 87.3 bps, the highest level since 2012, after hitting 90 bps last week. “The US gave the euro a tough start to December,” said Kyle Chapman, foreign exchange market analyst at Ballinger Group.
Across the pond, U.S. economic data released on Monday showed U.S. manufacturing activity improving in November, suggesting the U.S. economy remains strong and boosting the dollar. However, the Federal Reserve continues to rely on data, and all eyes will be on Friday's jobs report. Nonfarm payrolls (NFP) may provide a hint as to whether the Fed will cut rates again on December 18th.
Euro Frequently Asked Questions
The euro is the currency of the 19 European Union countries that belong to the euro area. It is the second most traded currency in the world after the US dollar. In 2022, Accounted for It accounts for 31% of all foreign exchange transactions and has an average daily trading volume of over $2.2 trillion. EUR/USD is the most frequently traded currency pair in the world. accounting An estimated 30% discount on all transactions, 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 of the euro area. The ECB sets interest rates and controls monetary policy. The ECB's main task is to maintain price stability, which means controlling inflation or stimulating growth. The main means of doing so is raising or lowering interest rates. Relatively high interest rates, or expectations of rising interest rates, usually benefit the euro and vice versa. The ECB Governing Council decides monetary policy at its eight annual meetings. Decisions will be made by the heads of the euro zone national banks and the six permanent members of the ECB, including Christine Lagarde, president of the ECB.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric indicator for the euro. If inflation rises more than expected, especially above the ECB's 2% target, the ECB will mandate interest rate hikes to rein in inflation. Relatively high interest rates compared to other countries typically benefit the euro, as it makes the region more attractive to global investors as a place to park their funds.
The data release will gauge the health of the economy and could have an 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. This could not only attract more foreign investment but also prompt the ECB to raise interest rates, which could directly lead to a stronger euro. Otherwise, if economic indicators are weak, the euro is likely to weaken. Economic data for the euro area's four largest economies (Germany, France, Italy and Spain) is particularly important, as they account for 75% of the euro area economy.
Another important data regarding 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 highly sought-after export goods, the value of its currency increases purely due to the additional demand generated from foreign buyers seeking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
