Euro softens to near 1.1400 as ECB tightening bets fade

ARTICOLI POPOLARI

The EUR/USD pair trades with mild losses around 1.1415 during the early Asian session on Tuesday. The Euro (EUR) softens against the US Dollar (USD) as traders reduce their bets on the European Central Bank (ECB) rate hikes this year.

EUR/USD loses ground to near 1.1415 in Tuesday’s early Asian session.
ECB’s Lagarde said Europe is getting more resilient to economic shocks.
Markets expect US rate hikes later this year.

ECB President Christine Lagarde said in a speech opening her institution’s annual retreat on Monday that Europe is becoming less vulnerable to outside shocks thanks to a better financial framework and progress on the green transition.

Lagarde emphasized that tensions subside amid a peace deal, which is “far from assured.” Policymakers must decide whether further monetary tightening is needed.

Markets have pared expectations for future ECB rate increases as energy prices retreat. Oxford Economics and Capital Economics expect the ECB won’t raise the interest rates further, though investors are still pricing one more quarter-point move, which would bring the deposit rate to 2.50%.

On the other hand, the path for US interest rates has been repriced much higher. Traders are now pricing in nearly a 60% chance of an interest rate hike from the US Federal Reserve (Fed) by September, according to the CME FedWatch tool.

The US ADP employment data and the US Nonfarm Payrolls (NFP) data will be the highlights later this week. These reports could offer some hints about the Fed’s monetary policy stance. Any signs of a robust US labor market could lift the Greenback and act as a headwind for the major pair.

Euro FAQs

What is the Euro?

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%).

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.

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