EUR/USD strengthens to near 1.1200 as risk appetite returns
- EUR/USD trades in positive territory near 1.1195 in Wednesday’s Asian session.
- US CPI inflation came in slightly below estimates in April.
- Traders reduce bets on ECB rate cuts after US-China talks.
The EUR/USD pair gains ground to around 1.1195 during the Asian trading hours on Wednesday. The US Dollar (USD) weakens against the Euro (EUR) after the cooler-than-expected US April inflation data. Traders await the German Harmonized Index of Consumer Prices (HICP) data for April for fresh impetus, which is due later on Wednesday.
Inflation in the United States (US), as measured by the change in the Consumer Price Index (CPI), declined to 2.3% YoY in April from 2.4% in March, below the market consensus of 2.4%, the Bureau of Labor Statistics reported on Tuesday. This figure registered the lowest since February 2021. The core CPI, excluding volatile food and energy prices, rose 2.8% YoY in April, compared to the previous reading and expectation of 2.8%. The US Dollar lost ground in an immediate reaction to the cooler US CPI report.
The US and China agreed to reduce tariffs on each other after two days of negotiations in Geneva, Switzerland. The US lowered tariffs on Chinese imports to 30% from 145%, while China cut tariffs on US imports to 10% from 125%. Optimism that a tariff deal between the world's two largest economies could cool the trade war has prompted traders to dial back odds of a recession. This, in turn, could provide some support to the Greenback and create a headwind to the major pair.
Across the pond, markets reduced bets on European Central Bank (ECB) interest rate cuts on Monday amid easing in trade and geopolitical tensions. Money markets have priced in an ECB deposit facility rate of as much as 1.80% by year-end, returning a few bps above levels seen in mid-April before the ECB suggested it was ready to cut rates in response to the potential adverse economic impact of US tariffs.
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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