Euro edges up from three-month lows as US Dollar buyers take a breather

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The Euro (EUR) trades practically flat against the US Dollar (USD) on Friday, changing hands at 1.1460 after bouncing up from three-month lows at 1.1420.

EUR/USD has bounced up to 1.1460 but remains about 0.9% down on the week.
The US Dollar is pulling back from recent highs in thin-volume trading
Rising hopes of Fed rate hikes are likely to keep US Dollar dips limited.

The Euro (EUR) trades practically flat against the US Dollar (USD) on Friday, changing hands at 1.1460 after bouncing up from three-month lows at 1.1420. The pair, however, remains on track for a 0.9% weekly decline, as rising bets of Federal Reserve (Fed) rate hikes have sent the US Dollar surging across the board.

US Dollar bulls are taking a breather amid the Juneteenth bank Holiday in the US. The Euro seems unable to take off from recent lows despite investors’ enthusiasm about the US-Iran peace deal and the decline in Oil prices. The market sees that lower energy prices will ease pressure on the European Central Bank to keep hiking rates, while, in the US, the Federal Reserve’s (Fed) hawkish stance has underpinned support for the Greenback.

Rising Fed tightening bets are boosting the USD

The Fed left interest rates on hold earlier this week, with the interest rate projections showing that nearly half of the committee members anticipate at least one rate hike this year. Beyond that, the new Chairman, Kevin Warsh, confirmed his commitment to bring inflation to target, altogether boosting bets of some monetary tightening later this year.

In the macroeconomic front, US data has continued showing resilience in the face of the Middle East conflict. Data released earlier this week showed that US Retail Sales rose beyond expectations in May, and the Philadelphia Fed Manufacturing Survey highlighted a strong recovery in June.

In the Eurozone, the German Producer Prices Index (PPI) showed a 2.2% yearly growth in May, above the previous month’s 1.7% year-on-year increase but below the 2.5% expected reading. The monthly increase slowed down to 0.3% from 1.2% in April, suggesting that the impact from the energy shock might be wearing off.

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.