- EUR/USD loses momentum towards around 1.0530 in the Asian session on Monday.
- Eurozone inflation rose to 2.3% year-on-year in November.
- The Fed’s cautious stance lends some support to the USD and acts as a headwind for EUR/USD.
The EUR/USD pair faces some selling pressure until around 1.0530 amid a firmer US Dollar (USD) during the early Asian trading hours 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), due later on Monday.
Inflation in the Eurozone, 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 2.0% target. Meanwhile, the core HICP rose 2.8% year-on-year in November, compared to 2.7% in the previous reading, also in line with expectations.
Market participants have fully priced in a 25 basis point (bps) rate cut by the ECB in December, which would mark the bank’s fourth rate cut this year. However, expectations for a substantial 50 bps reduction have eased since last month, with slight improvements to the forecast for tepid Eurozone growth. The expectation that the ECB will cut interest rates at its December meeting puts some selling pressure on the Euro (EUR).
On the other hand, the cautious stance of the US Federal Reserve (Fed) could continue to benefit the Dollar. Fed Chairman Jerome Powell stressed that “the economy is not sending signals that we need to rush to lower rates.” Powell added that “the strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” Markets now see a nearly 65.4% chance that the Fed will cut rates by a quarter point in December, according to the CME’s FedWatch tool.
The Euro FAQs
The Euro is the currency of the 19 countries of the European Union 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 turnover of more than $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), headquartered in Frankfurt, Germany, is the reserve bank of the eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main tool is the increase or decrease in interest rates. Relatively high interest rates (or the expectation of higher rates) tend to benefit the euro and vice versa. The Governing Council of the ECB makes decisions on monetary policy at meetings held eight times a year. Decisions are made by the directors of the Eurozone’s national banks and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), are an important econometric indicator for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts tend to benefit the euro, making the region more attractive as a place for global investors to park their money.
The published data measures the health of the economy and may have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence 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 may encourage the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is weak, the Euro is likely to fall. The economic data for the four largest eurozone economies (Germany, France, Italy and Spain) are especially significant, as they represent 75% of the eurozone economy.
Another important data that is published about 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 in-demand export products, its currency will gain value simply from the additional demand created by foreign buyers seeking to purchase those goods. Therefore, a positive net trade balance strengthens a currency and vice versa in the case of 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.
