Euro slips against the US Dollar as upbeat US economic data reinforces hawkish Fed bets
- EUR/USD trades lower as upbeat US data and Middle East tensions support the Greenback.
- ADP payrolls hit the highest level since January 2025 while ISM Services PMI beats forecasts.
- ECB rate hike expectations gain traction after Eurozone inflation accelerates.
EUR/USD ticks lower on Wednesday after closing the previous day virtually unchanged. The Euro (EUR) weakens as stronger-than-expected US economic data boosts demand for the US Dollar (USD), while renewed tensions in the Middle East further support the Greenback.
At the time of writing, EUR/USD is trading around 1.1607, extending this week’s decline. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.45, near the upper end of its recent range and up 0.25% on the day.
The latest data released on Wednesday showed ADP private payrolls rose by 122K in May from 105K in April, beating market expectations of 117K. It was also the highest reading since January 2025.
The ISM Services Purchasing Managers Index (PMI) climbed to 54.5 from 53.6, above forecasts of 53.8. However, the final S&P Global Services PMI eased to 50.7 from 50.9 and came in below expectations of 51.0.
The stronger-than-expected data reinforced expectations that the Federal Reserve (Fed) can afford to keep interest rates unchanged while assessing the inflationary impact of rising Oil prices linked to supply disruptions around the Strait of Hormuz.
Traders are currently expecting the Fed to keep rates on hold in the coming months and see a 40% chance of a 25 bps rate hike at the December meeting, according to CME FedWatch data.
New York Fed President John Williams said on Wednesday that he does not see “an obvious argument” to change interest rates right now and warned that “upside risks to inflation have increased.” Williams added that the Federal Reserve would respond if conditions change.
Across the Atlantic, hawkish European Central Bank (ECB) bets are also gathering pace after preliminary data released on Tuesday showed Eurozone inflation rose to 3.2% in May, the highest level since September 2023. Core inflation also accelerated to 2.5%.
A Reuters survey released on Wednesday showed that 74 of 80 economists expect the ECB to raise the deposit rate to 2.25% at its June monetary policy meeting.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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