EUR/USD rebounds as Trump threatens Fed’s independence, soft PPI weighs on USD
- Euro climbs after bouncing off a three-week low, back above 1.1600.
- Trump hints at firing Fed Chair Powell, then walks back comments, slamming him over rate delays.
- US PPI comes in below estimates, reinforcing dovish tilt but capping Euro upside.
The EUR/USD holds to earlier gains of 0.25% on Wednesday after US President Donald Trump threatened to remove the Federal Reserve (Fed) Chair Jerome Powell. This, along with a softer-than-expected inflation report on the producer side, capped the Euro’s advance versus the US Dollar. At the time of writing, the pair trades at 1.1633 after bouncing off three-week lows of 1.1562.
During the North American session, headlines at first suggested that Trump would sack Powell imminently. However, he later denied those rumors, though he continued to batter him, saying that Powell has been too late to cut interest rates. On the data front, the US Producer Price Index (PPI) edged below estimates and May’s reading in headline and underlying prints.
Atlanta Fed President Raphael Bostic said that he is not focused on news reports about the Fed but rather on matters that truly matter. The Fed unveiled its May Beige Book, which painted a solid economic outlook for the economy, as activity increased slightly from late May through early July.
The Eurozone schedule remained empty on Wednesday, with traders eyeing the release of June’s Harmonized Index of Consumer Prices (HICP) ahead of the July 24 European Central Bank (ECB) monetary policy meeting. Recent remarks from several members have shown that the Governing Council is split between cutting or holding rates unchanged.
Daily digest market movers: EUR/USD recovers 1.1600 but remains fragile
- Atlanta Fed President Bostic said that he would currently wait to cut rates, as inflation is not at the Fed’s target, adding that data would guide his decisions in the upcoming period. He stated that the Fed operates by committee with a diversity of views.
- The Fed Beige Book showed that economic activity increased, though uncertainty remains elevated and the outlook is neutral to slightly pessimistic. Regarding the labor market, employment increased somewhat overall, though hiring was limited due to ongoing economic and policy uncertainty. The book revealed that prices, despite moderating, had risen due to tariffs, particularly for raw materials, and businesses expect cost pressures to remain elevated.
- The US Producer Price Index (PPI) rose 2.3% YoY in June, down from 2.6% in May and below the expected 2.5%. Core PPI, which excludes food and energy, also softened to 2.6% from 3.0%, missing forecasts of 2.7%. While factory-level inflation has shown signs of cooling, consumer inflation continues to rise, with June CPI data indicating that prices are approaching the 3% mark, still well above the Federal Reserve’s 2% target.
- Interest rate probabilities show a 95% chance that the Fed will keep rates unchanged at its July 30 meeting, with just a 5% likelihood of a 25-basis-point cut. In broader terms, money markets have priced in less than 50 basis points of easing for the remainder of the year, with current expectations pointing to around 46 bps in total cuts by year-end.
- Trump’s letter to the EU triggered the alarms on the European Central Bank (ECB), which is set to paint a more negative scenario next week than previously thought in June. However, traders seem convinced that the ECB will hold rates unchanged at the next meeting.
- Since last week, ECB members have expressed their views regarding monetary policy. Centeno favors a pause or a cut, adding his name to the list of DeMarco, Vujcic and Villeroy. Supporting a rate cut is Fabio Panetta, who has been vocal about downside risks to growth. On the contrary, Isabel Schnabel stated that rates are in a good place and supports holding rates unchanged, echoing Robert Holzmann's comments to wait for more data.
Euro technical outlook: EUR/USD struggles at 20-day SMA, further downside eyed
The EUR/USD is neutral to upwardly biased, though to cement the uptrend, traders need to achieve a daily close above the 20-day Simple Moving Average (SMA) at 1.1681. Once done, this would pave the way for further gains, with 1.1700 up next. Followed by the July 20 daily high at 1.1749, ahead of 1.1800 and the record high of 1.1829.
On the flipside, a drop below 1.1600 would put into play today’s low of 1.1562. A break of the latter will expose the 50-day SMA at 1.1482, followed by the 100-day SMA at 1.1254.
Euro FAQs
The Euro is the currency for the 19 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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