Euro softens below 1.1450 as softer Eurozone inflation trims ECB hike bets

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The EUR/USD pair declines to around 1.1420 during the early Asian session on Thursday, pressured by a soft Eurozone inflation outlook. The US Dollar (USD) strengthens against the Euro (EUR) despite disappointing US June labor data.

EUR/USD drifts lower to around 1.1420 in Friday’s early Asian session.
Traders reduce their bets on ECB rate hikes after softer Eurozone inflation data.
US Nonfarm Payrolls missed expectations, rising by 57,000 in June.

Eurozone headline CPI cooled more than expected, falling to 2.8% YoY in June from 3.2% in May, Eurostat revealed on Wednesday. The core inflation dropped to 2.4% YoY in June from 2.6% in the previous reading. This report has reduced pressure on the ECB to maintain a highly aggressive interest rate stance, weighing on the shared currency. Financial markets see a one-in-three chance of a rate hike in July, but a move by October is fully priced in, according to Reuters.

ECB policymakers and Maltese central bank chief Alexander Demarco said on Wednesday that the central bank should not rush into any further rate hike given the unexpectedly quick retreat in oil prices. Meanwhile, Lagarde stated that the ECB was correct to raise interest rates last month, adding that the central bank is paying close attention to the risk of second-round effects, even though they have not materialized so far.

On the other hand, the downbeat US Nonfarm Payrolls (NFP) data might undermine the Greenback and cap the downside for the major pair. The US economy added 57,000 jobs in June, below the market consensus of 110,000, the US Bureau of Labor Statistics (BLS) showed on Thursday.

Additionally, the Unemployment Rate fell to 4.2% during the same period, down from 4.3% in May. That followed a report on Wednesday showing that US private payrolls increased less than expected in June.

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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