18-month low: Euro awaits Eurozone growth and US price data

18-month low for EUR/USD as the October floor gives way.
December could bring a larger Fed rate increase, extending the divergence with the ECB.
Friday brings Eurozone growth and employment data, followed by US producer prices.

The Euro has hit an 18-month low. Three consecutive daily declines, driven by the US side of EUR/USD, have pushed the pair down from near 1.1200 at Monday's close to around 1.1050. The session low was just below that level. Wednesday marked the first daily close beneath October's lows.

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A half-point increase should remain an option for December 9, Fed Governor Waller said on November 10, when US inflation also exceeded forecasts. Futures assign roughly nine chances in ten to a quarter-point rise, with the remaining probability on a half-point move. Thursday's jobless claims, at 200K versus a 195K forecast, left that pricing unchanged. Against the Fed's 3.75%-4.00%, the European Central Bank (ECB) deposit rate stands at 2.50%. Every upward shift in rate pricing therefore extends a differential already at least 1.25 percentage points wide.

More than 3% was added to Brent on Thursday after Iranian state media reported an attack on Sirik in southern Iran, lifting Crude Oil prices. Nearly all the Eurozone's Crude Oil is imported and paid for in Dollars. The same move took the Dollar Index to an 18-month high. Since August, most of the index's advance has reflected the Euro's decline.

0.4% quarterly growth forecast: the data calendar

Friday's schedule starts with ECB Executive Board member Schnabel speaking at 07:10 GMT. At 10:00 GMT, third-quarter Eurozone growth is expected to remain at 0.4% quarter on quarter and 1.3% year on year. Employment is forecast to rise 0.2%, following 0.1%. Wednesday, November 18 brings the final October inflation reading at 10:00 GMT. All these releases precede the ECB's December decision.

At 13:30 GMT on Friday, US producer prices are forecast to show a monthly increase of 0.4%, down from 1.3%, and annual growth of 6.6%, up from 6.3%. The next retail sales release, at 13:30 GMT on Tuesday, November 17, is expected to be flat after a 0.8% rise. Both reports will inform the scale of the Fed's December rate move.

5.5% below the late-August peak: the technical picture

Thursday's high only reached the lower edge of the 1.1100 to 1.1300 range that had held since October 2; the pair failed to re-enter it. EUR/USD now stands about 5.5% below its late-August peak just above 1.1700. None of the bars on the chart, which begins in the middle of July, has traded at a lower level.

EUR/USD: daily price chart

Euro: key questions answered

Which countries use the Euro, and how widely is it traded?

Across the European Union, the 20 countries in the Eurozone use the Euro as their currency. Only the US Dollar is traded more heavily worldwide. The Euro represented 31% of all foreign exchange transactions in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world's most actively traded currency pair. It is followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What role does the ECB play in the Euro's performance?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank, setting interest rates and directing monetary policy. Maintaining price stability is its principal mandate. This entails either containing inflation or supporting growth, primarily through increases or reductions in interest rates. The Euro typically benefits from relatively high rates, or expectations that rates will rise; the reverse also applies. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone's national banks and six permanent members, among them ECB President Christine Lagarde.

Why do inflation readings matter for the Euro?

Measured by the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. A stronger-than-expected inflation reading, particularly one above the ECB's 2% target, obliges the central bank to increase interest rates to restore control over prices. When interest rates in the region are relatively high compared with those elsewhere, global investors have a greater incentive to place funds there. This will usually support the Euro.

Which economic releases affect the Euro's value?

By revealing the economy's condition, data releases can move the Euro. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can all shape the single currency's direction. Economic strength supports the Euro by attracting additional foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular attention goes to Germany, France, Italy and Spain, the euro area's four largest economies. Together, they represent 75% of the Eurozone economy.

Why does the Trade Balance matter for the Euro?

The Trade Balance is another important release for the Euro. Over a specified period, it compares a country's export earnings with its spending on imports. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers seek to pay for those goods, lifting its value. A positive net Trade Balance therefore strengthens the currency, while a negative balance has the opposite effect.