- EUR/USD is holding steady around 1.0815 in early Asian trading on Wednesday.
- Germany unexpectedly contracted by 0.1% in the second quarter.
- The Fed is likely to keep rates unchanged at its July meeting on Wednesday.
The EUR/USD pair consolidates its losses around 1.0815 during the early Asian session on Wednesday. The major pair is marginally lower amid risk aversion and a weaker-than-expected preliminary German second quarter Gross Domestic Product (GDP). Investors prefer to stay on the sidelines ahead of the Federal Reserve (Fed) interest rate decision on Wednesday.
The German economy returned to contraction in the second quarter, shrinking 0.1% quarter-on-quarter after expanding 0.2% in the first quarter, according to first estimate data released by Destatis on Tuesday. This figure was weaker than the expected increase of 0.1%. Meanwhile, the annual rate of Gross Domestic Product (GDP) fell 0.1% in the second quarter, compared with a 0.2% contraction in the first quarter and the forecast of 0%. The Euro (EUR) exerted some selling pressure following the downbeat German GDP data.
However, the eurozone economy expanded by 0.3% in the three months to the end of June, above the market consensus for a 0.2% rise on a quarterly basis. Preliminary data on eurozone inflation and German retail sales are due later on Wednesday. These readings could offer some clues about the European Central Bank’s (ECB) rate cut in September.
Across the pond, the Fed is expected to keep interest rates unchanged at a two-day policy meeting on Wednesday. Nevertheless, markets widely anticipate the U.S. central bank to begin easing policy at its next meeting in September as inflation is declining faster than estimated in June. “Right now, a modest 25 basis point cut in September looks likely. If that goes well, we could even see two additional 25 basis point cuts before the end of 2024,” said Jacob Channel, chief economist at LendingTree.
Euro FAQs
The Euro is the currency of the 20 European Union countries that belong to the Eurozone. It is the second most traded currency in the world, behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), based in Frankfurt, Germany, is the reserve bank of the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main instrument is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher rates – generally benefit the Euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of the national banks of the Eurozone and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonised Index of Consumer Prices (HICP), is an important econometric data point for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, the ECB is forced to raise interest rates to bring inflation back under control. Relatively high interest rates compared to their peers usually benefit the euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases measure the health of the economy and can influence the Euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can 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 can encourage the ECB to raise interest rates, which will directly strengthen the Euro. Conversely, if economic data is weak, the Euro is likely to fall. Economic data from the four largest Eurozone economies (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone economy.
Another important output 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 during a given period. If a country produces highly sought-after export products, its currency will appreciate due to the additional demand created by foreign buyers who wish to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
