EUR/USD trims losses as disappointing US Retail Sales pressure the Greenback

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EUR/USD recovers from earlier lows as softer US Retail Sales weigh on the US Dollar.
ECB Vice President de Guindos’s remarks add mild support to the Euro.
Investors look ahead to US Nonfarm Payrolls and CPI for fresh monetary policy guidance.

EUR/USD recovers from earlier daily lows on Tuesday after spending most of the day in a tight range, as softer-than-expected US Retail Sales data weighs on the US Dollar (USD) and offers modest support to the Euro (EUR). At the time of writing, the pair is trading around 1.1922, holding near its more than one-week high reached on Monday.

US Retail Sales were flat in December, missing market expectations for a 0.4% increase and slowing sharply from November’s 0.6% rise. On a yearly basis, Retail Sales growth eased to 2.4%, down from 3.3% previously.

More importantly for growth and GDP tracking, the Retail Sales control group — which feeds directly into GDP calculations — fell by 0.1% in December, reversing November’s 0.2% increase. Meanwhile, Retail Sales excluding autos also came in soft, rising 0.0% on the month, below the 0.3% forecast and slowing from 0.4% in November.

On the labour front, the four-week average of the ADP Employment Change rose to 6.5K from 5.0K (revised from 7.75K). The Employment Cost Index for the fourth quarter rose by 0.7%, slightly below both the 0.8% market expectation and the 0.8% increase recorded in the previous quarter.

In reaction, the Greenback extends its decline for a third consecutive day, with the US Dollar Index (DXY), which tracks the US Dollar against a basket of six major currencies, trading near a more than one-week low around 96.66.

Meanwhile, the Euro also draws additional support from comments by Luis de Guindos, Vice President of the European Central Bank (ECB), who said that current interest rates remain appropriate and policymakers must stay open-minded about future decisions.

Guindos also noted that the recent appreciation in the Euro is “not dramatic” and that the inflation trend remains broadly in line with the ECB’s projections.

Attention now turns to key US economic releases due later this week, with Nonfarm Payrolls (NFP) on Wednesday and Consumer Price Index (CPI) on Friday. The data will be crucial in shaping expectations for the timing and pace of the Federal Reserve’s (Fed) next easing steps, with markets currently pricing in around 50 basis points (bps) of rate cuts.

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.