Euro weakens to near 1.1650 as hot US inflation boosts Fed hike expectations
- EUR/USD softens to around 1.1660 in Friday’s early Asian session.
- Hotter-than-expected US inflation reports have prompted markets to price out rate cuts for the remainder of 2026.
- Trump said Chinese leader Xi offered to help broker peace with Iran.
The EUR/USD pair trades in negative territory near 1.1660 during the early Asian session on Friday. The US Dollar (USD) edges higher against the Euro (EUR) as surging US inflation, linked to Middle East tensions, reinforces expectations that the US Federal Reserve (Fed) will keep interest rates higher for longer or potentially hike them.
US economic data released this week showed US Producer Price Index (PPI) inflation accelerated to the fastest pace since 2022 in April, while the Consumer Price Index (CPI) rose the most since 2023. Hotter-than-expected US inflation data have reinforced a "higher-for-longer" US interest rate outlook, supporting the Greenback and acting as a headwind for the major pair.
Markets are now pricing in nearly a 36.9% chance that the US central bank will raise the interest rate by at least 25 basis points (bps) at the December meeting, up from 22.5% a week ago, according to the CME FedWatch tool.
Nonetheless, positive developments surrounding the meeting between US President Donald Trump and Chinese President Xi Jinping in Beijing could lift a riskier asset, such as the shared currency.
Trump said on Thursday that he hoped the relationship between the US and China would be "stronger and better than ever before," adding that Xi offered help to resolve the conflict and pledged not to provide military equipment to Iran. Xi also wants to see the critical Strait of Hormuz reopened.
Euro FAQs
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%).
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.
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.
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.
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.
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