Euro softens toward 13‑month low near 1.1350 as rising US PCE inflation lifts US Dollar

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The EUR/USD pair loses ground to around 1.1365 during the early Asian trading hours on Friday. The major remains near a 13-month low as market expectations for US interest rate hikes have risen.

EUR/USD weakens to near 1.1365 in Friday’s early Asian session.
The US PCE price index rose 4.1% year-on-year in May.
Markets pare back future ECB hike bets following dovish comments from policymakers.

The EUR/USD pair loses ground to around 1.1365 during the early Asian trading hours on Friday. The major remains near a 13-month low as market expectations for US interest rate hikes have risen. Traders brace for the release of the Michigan Consumer Sentiment Index report, which will be released later on Friday.

US inflation increased further in May, with the headline Personal Consumption Expenditures (PCE) Price Index climbing 4.1% YoY, compared to 3.3% in April. This figure broke above 4.0% for the first time in three years as the Middle East conflict boosted energy prices, and kept an interest rate increase from the Federal Reserve (Fed) this year on the table.

Meanwhile, the core PCE, the Fed’s primary price gauge, rose 3.4% YoY in May, versus 3.3% prior. The annual core PCE reading was the highest since October 2023.

Financial markets have priced in nearly a 63.4% chance that the Fed will raise rates at the September 15-16 meeting, according to the CME FedWatch tool.

Dovish remarks from the European Central Bank (ECB) policymakers weigh on the shared currency. While the ECB raised its deposit rate by 25 basis points (bps) to 2.25% at its June policy meeting. ECB President Christine Lagarde said on Monday that the central bank does not need to respond aggressively to Middle East conflict spillovers. Lagarde further stated that the inflation shock facing the Eurozone is too large to ignore but not yet large enough to push up longer-term inflation.

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.