Euro trims gains but remains above 1.1200 with France still in the spotlight
- EUR/USD eases to 1.1220 area after being capped just above 1.1260 on Tuesday.
- Investors remain wary of placing large Euro bets with France's political uncertainty and debt issues weighing.
- The US Dollar remains depressed with investors pondering the scope of the Fed's tightening cycle.
The Euro (EUR) ticks lower against the US Dollar (USD) on Wednesday, giving back some of the ground taken over the last few days. The EUR/USD pair trades at 1.1220 after being halted just above 1.1260 on Tuesday, with unrest in France spooking investors while the country’s borrowing costs keep climbing.
The French government was forced to impose partial curfews in several cities this week after the student protests, which had extended through the country over the last few weeks, turned violent last weekend, triggering scenes of looting and destruction that went around the world.
France's borrowing costs are a key headwind for Euro recovery
Meanwhile, France’s debt premium continues escalating. The yield of the 10-year French OAT has stretched to 4.98%, its highest level in 24 years. The spread with the safer-considered German Bund, a gauge used to measure the country's risk premium, has escalated to 157 basis points, its highest level since the 2009-2011 financial crisis.
The Euro, however, is drawing some support from a soft US Dollar, which keeps the pair from retreating further. In the absence of key US macroeconomic releases, the US Dollar is lacking momentum, as investors brace for a Federal Reserve (Fed) pause next week and ponder the scope of the monetary tightening cycle.
ING: Dollar softens as AI jitters and shifting Fed Oil reaction weigh
Analysts at ING observe that the Dollar “continues to trade with a soft undertone,” and attribute the trend to “a mix of some aftereffects of AI-related concerns (Corewave bonds had another wobble yesterday) and stretched longs/ short-term overvaluations being unwound.”
ING also highlights a subtle shift in how the currency is responding to energy markets, arguing that “the dollar’s reaction function to Oil may have changed over the past week or so.” In their view, “rising concerns about tech stocks have somewhat dented the market’s hawkish conviction on the Fed, allowing for greater dovish flexibility at the front end in response to non-data inputs like an oil selloff,” which in turn is helping to reinforce the Dollar’s softer tone.
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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