EUR/USD weakens below 1.1700 as traders brace for Eurozone HICP data

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The EUR/USD pair loses momentum to around 1.1695, snapping the three-day winning streak during the Asian trading hours on Tuesday, pressured by a firmer US Dollar.

EUR/USD loses traction to around 1.1695 in Tuesday’s Asian session.
Persistent Russia-Ukraine geopolitical tensions and fears of a new political crisis in France undermine the Euro.
Dovish tone of the Fed might help limit the pair’s losses.

The EUR/USD pair loses momentum to around 1.1695, snapping the three-day winning streak during the Asian trading hours on Tuesday, pressured by a firmer US Dollar. The preliminary reading of the Eurozone Harmonized Index of Consumer Prices (HICP) and the US ISM Manufacturing Purchasing Managers Index (PMI) for August will be in the highlights later on Tuesday.

The Euro (EUR) weakens against the US Dollar (USD) amid the persistent Russia-Ukraine conflict. Russian drone attacks on power facilities in northern and southern Ukraine on Sunday left nearly 60,000 customers without electricity, per the Guardian.

Meanwhile, Ukrainian President Volodymyr Zelenskyy vowed to retaliate by ordering more strikes deep inside Russia. Ongoing conflict between Russia and Ukraine implies higher energy costs and increases geopolitical uncertainty in the Eurozone, which generally exerts some selling pressure on the EUR.

Furthermore, the French Prime Minister François Bayrou will hold a confidence vote on September 8, bringing back fears of recession. Opinion polls from Reuters showed that most French people now want new national elections, pointing to deepening dissatisfaction with politics and a risk of lasting uncertainty. This, in turn, might drag DXY lower in the near term.

Across the pond, dovish remarks from a Federal Reserve (Fed) official last week have indicated a potential shift in policy, acknowledging slowing economic activity. This, in turn, might weigh on the Greenback. Market probabilities, as indicated by the CME FedWatch Tool, have recently shown a high chance, nearly 89% of a 25 basis points (bps) rate cut in September, though this fluctuates based on new information.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 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.