Euro retreats below 1.1650 as inflation data buoys US Dollar ahead of Jackson Hole
- EUR/USD reversal from 1.1700 extends below 1.1650 on Thursday.
- Hot US inflation data adds pressure on the Fed to hike interest rates and buoys the Greenback.
- In Europe, upbeat German macroeconomic figures have failed to support the Euro.
The Euro (EUR) heads lower for the second consecutive day on Thursday, with the US Dollar (USD) supported by strong US inflation data released on Wednesday. The EUR/USD pair trades at weekly lows sub-1.1650 during the European trading session, extending its reversal from the three-month highs above 1.1700 hit earlier on the week.
The Greenback is drawing some support from the hot US Personal Consumption Expenditures (PCE) Price Index released on Wednesday, which has given Federal Reserve (Fed) hawks further reasons to support interest rate hikes in the coming months. Bets on a September hike, however, remain practically unchanged, at 36%, according to figures released by the CME Group’s FedWatch Tool as investors await Fed Chair Warsh’s speech at Jackson Hole on Friday for further clues about the bank’s monetary policy.
German data beats expectations
In the Eurozone, the German GfK Consumer Sentiment Index, released earlier on Thursday, showed an unexpected improvement and revealed that German consumers are more optimistic about their income and the economic momentum in general. These figures follow an upward revision of German Q2 Gross Domestic Product (GDP) figures and another positive surprise on the IFO business climate earlier in the week, but have failed to provide any significant support to the Euro.
Later on Thursday, the European Central Bank (ECB) will release the minutes of its latest monetary policy meeting, which, in the absence of more relevant data, might gather some interest.
Analysts at Danske Bank expect them to “show a bias for a rate hike in September, which is also fully priced in by markets.” However, the bank cautions that there will “likely be limited signals beyond September,” and therefore the publication “is not expected to be a market mover.”
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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