Euro trims losses on ECB tightening hopes, mild US Dollar weakness

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The Euro (EUR) ticks up for the second consecutive day against the US Dollar (USD) on Tuesday to pare some of last week’s losses.

EUR/USD extends gains beyond 1.1550 after bouncing from 1.1500 lows on Monday.
ECB tightening hopes and a fragile optimism about a lasting peace in the Middle East are supporting the pair.
US Dollar losses remain limited amid growing Fed tightening bets.

The Euro (EUR) ticks up for the second consecutive day against the US Dollar (USD) on Tuesday to pare some of last week’s losses. The pair is trading at 1.1555, session highs at the time of writing, up from 1.1500 lows on Monday, favoured by hopes that the European Central Bank (ECB) will hike rates this week, while a mild risk appetite is weighing on the safe-haven US Dollar

Data released earlier on Tuesday showed that German Industrial Production bounced to 0.4% growth in April, in line with market consensus, following an upwardly revised 0.1% contraction in March and a 0.5% fall in February. At the same time, German Trade Balance data showed a EUR 14.5 billion surplus in April, down from EUR 14.7 billion in March and undershooting market expectations of EUR 15 billion.

The ECB is expected to hike rates on Thursday

The Euro is drawing support from a generalised view that the ECB will tighten its monetary policy at Thursday’s meeting. The ECB is widely expected to hike its deposit rate by 25 basis points to 2.25% amid high inflation and hint at a pause, as the sluggish Eurozone will deter the bank from adopting an aggressive monetary policy.

On the Geopolitical front, an Israeli attack on the Lebanese city of Tyre has killed eight people, despite US President Donald Trump’s warning to Netanyahu to halt the hostilities. Rarliewr on the day Trump showed optimism about reaching a deal with Tehran, which has triggered a moderate risk-on mood in financial markets.

An improved market sentiment is weighing on demand for the safe-haven US Dollar, although downside attempts remain limited. Solid US macroeconomic data released last week have boosted hopes of Federal Reserve rate hikes later in the year, and investors are now awaiting the release of Wednesday’s US Consumer Price Index (CPI) data for a better assessment of the Fed’s forward path.

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.