Euro gathers strength above 1.1500 as cooling inflation data weighs on US Dollar
- EUR/USD gains ground to around 1.1535 in Friday’s early European session.
- The US PPI came in unchanged on a monthly basis in July.
- Traders are expecting an ECB rate hike in September.
The EUR/USD pair gains ground to near 1.1535 during the early Asian session on Friday. The US Dollar (USD) softens against the Euro (EUR) following a softer-than-expected US inflation report. The US July Retail Sales data will take center stage later on Friday.
Wholesale costs for goods and services in the United States (US) were flat in July, according to the Bureau of Labor Statistics on Thursday. This figure followed a revised 0.1% decline in June and cooled by more than the expected 0.2%. This report added to evidence that inflationary pressure is gradually easing after Wednesday's Consumer Price Index (CPI) data, weighing on the Greenback.
Excluding food and energy, the core Producer Price Index (PPI) rose 0.2%, below the market consensus of a 0.3% gain. On an annual basis, the headline PPI climbed 4.7% YoY in July, while the core PPI rose 4.2% YoY during the same period.
Markets are now pricing a 34.8% probability of a US rate hike at the September meeting, down from 40% immediately after the PPI data, according to the CME FedWatch Tool.
Across the pond, the European Central Bank (ECB) is expected to raise interest rates by 25 basis points (bps) at its September monetary policy meeting. ECB President Christine Lagarde warned last month that renewed Middle East hostilities and the resultant rebound in oil prices pose upside risk to the Eurozone inflation outlook.
Dollar caught between fading Fed hike bets and Hormuz-related safe haven support
Strategists at Rabobank highlight the conflicting forces currently shaping the USD outlook. They argue that “if Fed rate hike speculation continues to be pared back, in line with RaboResearch’s view, the USD will be exposed to potential downside pressures.” However, they also stress that “the uncertainties regarding the re-opening of the Strait of Hormuz remain a USD supportive factor,” noting that at the start of the Iran war “the market was positioned short of USDs,” leaving the Dollar particularly sensitive to shifts in geopolitical risk and safe haven demand.
Technical Analysis: EUR/USD maintains a negative outlook in the near term
In the daily chart, EUR/USD keeps a mildly bearish tone as it holds beneath the 100-day moving average (MA) and the upper Bollinger Band. Price remains supported by the middle Bollinger Band and a 20-day simple moving average, while the Relative Strength Index (14) at 58.3 shows improving but not overbought momentum, hinting at a corrective bounce that is still capped by overhead trend levels.
On the topside, initial resistance is seen at the 100-day MA at 1.1565, followed by the upper Bollinger Band at 1.1620, a break above which would be needed to ease the current downside bias. On the downside, immediate support emerges at the middle Bollinger Band near 1.1480, with a deeper floor aligning at the lower Bollinger Band around 1.1340, where selling pressure could pause if bears extend control.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Euro FAQs
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%).
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.
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.
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.
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.
