EUR/USD falls toward 1.1600 ahead of HCOB PMI data
- EUR/USD faces challenges ahead of HCOB Purchasing Managers’ Index data from Eurozone and Germany.
- The US Dollar strengthened as yields on US Treasury bonds moved higher.
- French 30-year yields sit at 4.5%, highest since 2009, while German 30-year yields trade at 3.41%, their peak since 2011.
EUR/USD extends its losses for the second successive session, trading around 1.1620 during the Asian hours on Wednesday. HCOB Purchasing Managers’ Index (PMI) data from Eurozone and Germany will be eyed later in the day.
The EUR/USD pair depreciates as the US Dollar (USD) gains ground amid rising yields on US Treasury bonds, with the 2-year at 3.65% and the 10-year at 4.28% standing at the time of writing. Rising Treasury yields make US assets more attractive to global investors, hence capital inflows increase demand for USD.
However, market sentiment weakened after the US Court of Appeals for the Federal Circuit ruled that most of Trump’s tariffs were illegal, though they will remain in effect until October 14 pending a Supreme Court appeal.
Meanwhile, US Treasury Secretary Scott Bessent said on Tuesday that he expects the Supreme Court will approve Trump’s use of a 1977 emergency powers law to slap the tariffs on trading partners, and the administration has a backup plan if it does not. Trump, meanwhile, pledged to seek an “expedited ruling” from the Court.
The US Dollar faced challenges as the business activity in the US manufacturing sector contracted slightly in August. Institute for Supply Management's (ISM) Manufacturing Purchasing Managers Index (PMI) improved to 48.7 from July’s 48.0 but falling short of expected 49.0 reading. Meanwhile, ISM Manufacturing Employment Index edged higher to 43.8 from 43.4 prior, while the Manufacturing Prices Paid, the inflation component, retreated to 63.7 from 64.8.
The US JOLTS Job Openings and the Fed Beige Book will be eyed later in the North American session. Traders will also likely observe upcoming labor market data this week, including ADP Employment Change, Average Hourly Earnings, and Nonfarm Payrolls for August. The key reports could shape the US Federal Reserve’s (Fed) policy decision in September.
The EUR/USD pair also faces challenges as the Euro (EUR) struggles on rising European government bond yields amid rising fiscal concerns. French 30-year yield stand at 4.5%, highest since 2009 and German 30-year yields stand at 3.41%, highest since 2011, at the time of writing.
Concerns over France’s debt burden are a central factor behind Prime Minister François Bayrou’s confidence vote scheduled for next week. Germany’s medium-term financial plan projects about €500 billion in net new borrowing through 2029 to support higher infrastructure and defense spending.
However, the downside of the Euro could be restrained as persistent Eurozone inflation reinforced the expectations that the European Central Bank (ECB) will keep interest rates unchanged at September’s meeting. Eurozone Harmonized Index of Consumer Prices (HICP) rose 2.1% YoY in August, came above both market expectations and the European Central Bank’s (ECB) 2.0% target.
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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