Euro holds gains at one-month highs near 186.00 despite Japanese Yen’s strength

ECB tightening hopes are supporting the Euro

In Europe, data has not been particularly Euro-supportive, as Industrial Production contracted against expectations in May. Eurozone Central Bank (ECB) policymakers, however, have maintained their hawkish stance, fuelling hopes that the central bank will hike rates later this year, and underpinning support to the Euro

The Austrian Central Bank Governor and ECB board member Marin Kocher said on Wednesday that he does not see second-round inflationary effects as of now, but that the bank is “ready to act” should that be necessary. At a later time, also on Wednesday, the Bundesbank President and also ECB member Joachim Nagel reiterated that, from the monetary policy perspective, it remains advisable to “act decisively” if needed.

The Yen, on the other hand, has remained vulnerable this week, after a Reuters report suggested that the Japanese Government does not have a specific plan to repatriate investments from the Government Pension Investment Fund (GPIF). The initiative, announced by the Finance Ministry last week, triggered a positive near-term reaction on the Yen, but traders have gradually resumed their JPY-selling positions as they realised that it might take months, if not years, for those plans to come into action.

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.