- EUR/USD lost momentum in Asian trading on Monday near 1.0530.
- Eurozone inflation rose to 2.3% year-on-year in November.
- The Fed's cautious stance has provided some support for the USD and is a headwind for EUR/USD.
EUR/USD faces selling pressure near 1.0530 as the US dollar (USD) strengthens in early Asian trading on Monday. Investors will closely monitor European Central Bank (ECB) President Christine Lagarde's speech and the release of the US ISM Manufacturing Purchasing Managers' Index (PMI) later on Monday.
Eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), rose to 2.3% year-on-year in November from 2.0% in October, in line with market expectations. This figure exceeded the ECB's target of 2.0%. Meanwhile, core HICP rose 2.8% year over year in November and was up 2.7% in the last reading. This also matched our expectations.
Market participants have fully priced in the ECB's 25 basis point (bp) rate cut in December, which will be the ECB's fourth rate cut this year. However, expectations for a deep 50bps cut have been subsided since last month, with the euro zone's slow growth forecast being revised slightly upwards. Expectations that the ECB will cut interest rates at its December meeting are putting some selling pressure on the euro (EUR).
On the other hand, the US Federal Reserve's cautious stance may continue to support the US dollar. Fed Chairman Jerome Powell said, “The economy is not sending a signal that we need to cut rates any faster.'' “The strength we're seeing in the economy right now allows us to approach decisions with care,” Powell added. The market currently sees a nearly 65.4% chance that the Fed will cut interest rates by a quarter of a percentage point in December, according to the CME FedWatch tool.
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.
