Euro picks up favoured by a weaker US Dollar but remains within previous ranges

Fed rate hike hopes ease

These figures give the Federal Reserve (Fed) some margin to keep interest rates on hold at its July meeting and have prompted investors to dial down expectations of Fed rate hikes in the coming months. The CME FedWatch Tool shows a 60% chance of a hike in September, down from 75% before the CPI release.

Fed Chairman Kevin Warsh showed a distinct hawkish tone at its first congressional testimony, vowing a “resolute commitment to restore price stability” and defending the central bank’s independence from political pressures. His comments, however, failed to lift the US Dollar.

In Europe, the European Central Bank Governor Martin Kocher said earlier on Wednesday that there is no sign of second-round inflationary effects from Iran’s war so far, but that the bank is ready to act if needed.

Meanwhile, the conflict in the Middle East continues to deteriorate. The US has closed the Strait of Hormuz for Iranian vessels, and US President Donald Trump threatened to target civilian infrastructure, like bridges and power plants. Tehran threatened to close other strategic energy routes. Market sentiment remains weak, with Oil prices pinned near monthly highs. All in all not the best scenario for a strong Euro recovery.

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.