Euro remains subdued following German inflation data
- EUR/USD holds losses as the Euro draws no support from German inflation data.
- Germany's HICP inflation rose to 2.8% in July due to surging energy costs, reversing June's slowdown to 2.3%.
- US Dollar Index gains on safe-haven demand amid rising uncertainty over Middle East peace talks.
EUR/USD extends its losses for the third successive day, trading around 1.1540 during the European hours on Wednesday. The pair holds losses as the Euro (EUR) remains weaker following the release of Germany’s Harmonized Index of Consumer Prices (HICP) data.
German inflation surged back to 2.8% in July, reversing a recent downward trend fueled by a sharp acceleration in energy costs. After slowing to 2.3% in June from 2.6% in May and 2.9% in April, consumer prices gathered fresh momentum. Ruth Brand, President of the Federal Statistical Office (Destatis), noted that energy prices continued to climb at an above-average pace, acting as the primary catalyst behind the month's rising inflation rate.
Eurozone growth surprise bolsters near-term Euro resilience
Rabobank highlights that the Eurozone’s growth pulse has been firmer than markets anticipated, noting that “Eurozone Q2 GDP growth was stronger than expected at 0.4% q/q, compared with a median expectation of 0.2% q/q.” This upside surprise in headline activity data underscores a degree of resilience in the bloc’s economy, even as investors continue to weigh the implications of higher energy costs, lingering supply disruptions and evolving policy expectations for the Euro.
The EUR/USD pair depreciates as the US Dollar (USD) gains ground on increased safe-haven demand amid rising uncertainty surrounding Middle East peace talks. Pakistan’s defence minister indicated that Washington and Tehran were approaching an agreement regarding the Strait of Hormuz, alongside reports that parallel negotiations between Iran and Oman had reached an advanced stage. However, US President Donald Trump insisted that Tehran must pay reparations to the victims of attacks associated with the Islamic Republic, injecting renewed caution into the markets.
Traders are likely observing the upcoming inflation report closely due later in the day, as it is expected to play a major role in shaping the Federal Reserve’s (Fed) next interest rate decision.
Market expectations remain divided over the central bank's rate trajectory following its decision to hold rates steady in July. Although rising crude oil prices have fueled arguments for a more aggressive policy stance, odds for a 25-basis-point Fed rate hike in September have softened slightly, dropping to nearly 48% according to the CME FedWatch Tool, down from 52% the previous day.
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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