EUR/USD weakens below 1.1750 amid fears of political crisis in France

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EUR/USD softens to near 1.1730 in Monday’s early European session.
The Fitch agency downgraded France’s credit rating on Friday.
The US central bank is anticipated to cut rates for the first time since December.

The EUR/USD pair loses ground to around 1.1730 during the early European session on Monday. The Euro (EUR) weakens against the US Dollar (USD) as ratings agency Fitch downgraded France's credit rating amid political turmoil. Traders will closely monitor the European Central Bank’s (ECB) Christine Lagarde speech and the US Federal Reserve (Fed) interest rate decision later on Wednesday.

The Fitch agency, one of the top global institutions gauging the financial solidity of sovereign borrowers, downgraded France’s credit rating on Friday from “AA-” to “A+.” This registered the country’s lowest level on record at a major credit rating agency.

The move came days after François Bayrou resigned as Prime Minister after losing a parliamentary confidence vote over an attempt to get an austerity budget adopted. Fears of political turmoil in France could undermine the shared currency in the near term.

The downside for the major pair might be limited as a weakening US labor market reinforced expectations that the US central bank will deliver its first rate cut of the year on Wednesday. Pricing of Fed fund futures indicates that the market believes the Fed is certain to cut its key interest rate by 25 basis points (bps) on September 17, according to the CME FedWatch tool.

The University of Michigan (UoM) said on Friday its Consumer Sentiment Index for September fell to 55.4 in its preliminary estimate, from 58.2 in August. This reading came in worse than the market expectation of 58.0 and marked a second straight month in September, weighing on the Greenback.

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.