Euro recovers above 1.1700 as ECB rate hike expectations counter stronger US PPI
- EUR/USD rebounds to around 1.1720 in Thursday’s early Asian session.
- ECB is expected to hike its deposit rate next month, according to a Reuters poll.
- US PPI jumped by 6.0% YoY in April, hotter than expected.
The EUR/USD pair recovers some lost ground to near 1.1720 during the early Asian session on Thursday. The Euro (EUR) edges higher against the US Dollar (USD) on hawkish signals by European Central Bank (ECB) officials. Traders will take more cues from the US Retail Sales report for April, which is due later on Thursday.
ECB policymaker Joachim Nagel said on Wednesday that the probability that the central bank will need to raise borrowing costs due to the Iran war is rising. Meanwhile, ECB Chief Economist Philip Lane argued that officials must carefully study the fallout on growth and inflation before making a judgment call and that determining the appropriate monetary policy stance is a judgment call.
The majority of economists, around 85%, expected the ECB to raise its deposit rate by 25 basis points (bps) to 2.25% in June, up from just over half who expected that before the April meeting, according to a Reuters poll.
On the other hand, the US Bureau of Labor Statistics on Wednesday revealed the hottest wholesale inflation reading since late 2022, with the US Producer Price Index (PPI) jumping by 6.0% YoY in April. This reading followed the 4.3% seen in March and was above the market consensus of 4.9%.
On a monthly basis, the PPI inflation climbed to 1.4% in April from 0.7% in March and was much higher than the anticipated 0.5%. Hotter-than-expected US PPI inflation data might help limit the Greenback’s losses in the near term.
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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