Euro edges towards range lows as US rate bets rise

1.1150 gives way as EUR/USD surrenders most of Monday's advance.
Two percentage points could separate Fed rates from the ECB's 2.50% deposit rate.
Two speeches by ECB President Lagarde precede Friday's Eurozone GDP release.

1.1100-1.1300 remains the Euro's trading range. Five weeks into that band, the currency has returned to its lower half following stronger-than-forecast US consumer price data. Almost all of Monday's advance was erased as it slipped just below 1.1150, before edging back above that mark.

October's core US consumer prices increased 0.3%, exceeding the 0.2% forecast. Before a pause, two further quarter-point rate rises are needed, according to Dallas Fed President Logan. Traders assign about a 74% probability to a second increase by January. Unless the European Central Bank (ECB) also raises rates, those two moves would leave US rates 1.75-2.00 percentage points above its 2.50% deposit rate.

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While two Fed officials specified the size of their prospective rate moves, ECB Chief Economist Lane said he would require a high bar to be met before signalling the ECB's next rate direction. October brought Eurozone inflation to 4%, a three-year high. Money markets are pricing in two ECB rate increases by mid-2027, which would reduce that differential for the Euro.

Speeches and data ahead

Wednesday's schedule includes ECB President Lagarde at 09:45 GMT, followed by another speech on Thursday at 19:30 GMT. ECB Executive Board member Schnabel speaks on Friday at 07:10 GMT. Updated third-quarter Eurozone Gross Domestic Product (GDP) follows at 10:00 GMT on Friday. Growth is forecast at 0.4%, unchanged from the initial estimate. Both Lagarde's comments and the GDP reading will inform whether the ECB also raises rates in December.

Thursday brings remarks from Cleveland Fed President Hammack at 14:00 GMT. Hammack holds a vote this year. The US core producer price reading is due on Friday at 13:30 GMT, with annual growth forecast to remain at September's 5%. A Fed rate increase on December 9 is already priced in.

5% decline precedes range trading

A decline of about 5% from the late-August peak near 1.1700 brought the Euro into its current range. Repeated advances have reversed just below the upper boundary, most recently on 5 November. At the lower end, the lows recorded on 14 October and 29 October remained just above the range floor.

Daily price chart: EUR/USD

Euro: frequently asked questions

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

Across the European Union, 20 countries use the Euro and form the Eurozone. 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. Next are EUR/JPY at 4%, EUR/GBP at 3% and EUR/AUD at 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 overseeing monetary policy. Price stability is its core mandate, pursued through inflation control or support for economic growth. Raising and lowering interest rates is its main policy instrument. The Euro usually benefits when rates are relatively high, or expected to rise; the reverse also applies. Monetary policy is decided by the ECB Governing Council, which meets eight times annually. The decision-makers comprise the heads of Eurozone national central banks and six permanent members, among them ECB President Christine Lagarde.

Why do inflation readings matter for the Euro?

The Harmonised Index of Consumer Prices (HICP), which measures Eurozone inflation, is a key economic indicator for the Euro. An inflation reading above expectations, particularly one exceeding the ECB's 2% target, requires the central bank to increase interest rates to restore control over prices. When the region's interest rates are relatively high compared with those elsewhere, the Euro usually benefits. Higher rates make the region a more attractive destination for global investors' funds.

Which economic indicators can move the Euro?

By providing a measure of economic health, data releases can affect the Euro's direction. Relevant indicators include GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys. Economic strength supports the Euro by drawing in more 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. Germany, France, Italy and Spain warrant particular attention in economic releases. As the euro area's four largest economies, they represent 75% of the Eurozone economy.

Why is the Trade Balance important for the Euro?

The Trade Balance is another major release affecting the Euro. Over a specified period, it records the difference between a country's export earnings and its spending on imports. Strong overseas demand for a country's exports creates additional demand for its currency as foreign buyers seek to purchase those goods, lifting its value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.