The EUR/USD pair extends its upside to near 1.1615 during the Asian trading hours on Tuesday. The US Dollar (USD) weakens against the Euro (EUR) as weaker-than-expected US Manufacturing PMI data heaps pressure on the Federal Reserve (Fed) to cut interest rates later this month.
Data released by the Institute for Supply Management (ISM) on Monday revealed that US manufacturing contracted for the ninth straight month in November, with the Manufacturing PMI declining to 48.2 in November from 48.7 in October. This figure came in worse than the estimation of 48.6.
Following softer US economic data, Fed funds futures traders are now pricing in nearly an 87% chance of a reduction at the conclusion of the Fed’s December 9-10 meeting, up from 71% odds a week ago, according to the CME FedWatch Tool.
The shared currency receives support from the growing acceptance that the European Central Bank (ECB) is done cutting interest rates. ECB President Christine Lagarde said last week that borrowing costs are at the “right level.” Meanwhile, ECB Governing Council member Joachim Nagel noted that he’s comfortable with the monetary-policy settings.
The preliminary reading of the Harmonized Index of Consumer Prices (HICP) from the Eurozone will be closely watched later on Tuesday. The HICP is expected to show an increase of 2.1% YoY in November, while the core HICP is estimated to show a rise to 2.5% during the same period. Any signs of softer inflation in the Eurozone could weigh on the Euro against the Greenback in the near term.
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.