- EUR/USD trades in negative territory for the second consecutive day around 1.0915 in Wednesday’s Asian session.
- Traders expect a deeper Fed rate cut in September this year.
- The disappointing Eurozone June Retail Sales report exerts some selling pressure on the Euro.
The EUR/USD pair trades on a softer note near 1.0915 after retracing from seven-month highs of nearly 1.1008 during the Asian trading hours on Wednesday. The firmer US Dollar (USD) broadly drags the major pair lower. Investors await the release of June Trade Balance and Industrial Production from Germany, which are due later in the day.
The recovered risk sentiment and high US Treasury bond yields provide some support to the Greenback. Nonetheless, investors expect a more aggressive rate cut from the Federal Reserve (Fed) starting in September. This, in turn, might cap the USD’s upside and create a tailwind for EUR/USD. Meanwhile, the markets have priced in a 69.5% possibility of a 50 basis points (bps) Fed rate cut in September, up from 13.2% last week, according to the CME FedWatch tool.
On the US docket, the trade deficit narrowed to $73.1 billion in June as the value of exports of goods and services increased by the most since earlier this year, according to the US Census Bureau on Tuesday.
On the other hand, more sluggish evidence about the eurozone economy exerts some selling pressure on the Euro (EUR). Data released by Eurostat revealed on Tuesday that Eurozone Retail sales unexpectedly fell by 0.3% in June versus a rise of 0.5% prior. The market consensus was a 0.1% increase.
Euro FAQs
The Euro is the currency for the 20 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.