- EUR/USD rises ahead of US inflation data due on Wednesday.
- The US dollar has weakened as Treasury prices continue to fall amid growing likelihood of a rate cut by the Fed in September.
- Traders expect the ECB to cut interest rates by 25 basis points when it meets on Thursday.
EUR/USD stopped a three-day losing streak and traded near 1.1050 in the Asian session on Wednesday. The EUR/USD pair gained on the back of a weaker US Dollar (USD) ahead of U.S. Consumer Price Index (CPI) data due later North American time. The inflation report may provide further hints about the size of the Federal Reserve’s (Fed) interest rate cut in September.
The US Dollar (USD) is facing difficulties as US Treasury yields continue to fall. The US Dollar Index (DXY), which compares the value of the US Dollar to six other major currencies, has halted three consecutive days of gains. At the time of writing, the DXY is trading around 101.40, with 2-year and 10-year US Treasury yields at 3.57% and 3.62%, respectively.
However, the release of the US labor market report last week has increased uncertainty about the likelihood of a bold rate cut from the Federal Reserve at its September meeting. According to the CME FedWatch tool, the market fully expects at least a 25 basis points (bps) rate cut at the September meeting. The likelihood of a 50 bps rate cut has slightly decreased to 31.0% from 38.0% a week ago.
The Euro came under downward pressure from recent German inflation data. The Harmonized Consumer Price Index (HICP) remained at 2.0% year-on-year in August, as expected. The monthly index showed a steady decline of 0.2%, as expected. Similarly, the Consumer Price Index (CPI) remained stable at 1.9% year-on-year in August, as expected.
Traders expect the European Central Bank (ECB) to cut interest rates by 25 basis points to 4.0% when it meets on Thursday.
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 usually benefit the euro, as they make 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.
