EUR/USD rises as Greenback suffers due to plunging US bond yields
- EUR/USD edges up to near 1.1200 as the US Dollar softens due to a substantial correction in US Treasury yields.
- US consumer and producer inflation, and Retail Sales remained soft in April.
- ECB’s Kazaks argued in favor of further interest rate cuts.
EUR/USD ticks up to near 1.1200 during European trading hours on Friday. The major currency pair trades higher as the US Dollar (USD) faces selling pressure, tracking a sharp decline in US bond yields, after the release of the soft United States (US) Producer Price Index (PPI) and Retail Sales data on Thursday.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges down to near 100.50. Meanwhile, 10-year US Treasury yields are down over 3% to near 4.40% from their monthly high of 4.55% posted on Thursday.
The economic data showed on Thursday that the producer inflation, as measured by the PPI, declined unexpectedly in April, and Retail Sales barely grew. The notable decline of 0.7% in services prices led to deflation in the PPI, while the growth in goods prices remained flat. Meanwhile, Retail Sales rose at a moderate pace of 0.1%, compared to a robust growth of 1.5% in March. The data showed that demand for automobiles declined as households postponed their demand in the wake of a hike in selling prices by car dealers to offset the impact of tariffs imposed by US President Donald Trump on foreign cars in March.
This week, the US Consumer Price Index (CPI) data for April also grew at a slower-than-expected pace. Theoretically, soft US consumer and producer inflation boosts expectations of interest rate cuts by the Federal Reserve (Fed). However, traders have not raised dovish bets as consumer inflation expectations remain higher due to the fallout of new economic policies by US President Donald Trump.
According to the CME FedWatch tool, the probability for the Fed to leave rates steady in the range of 4.25%-4.50% in the June and July meetings is 91.8% and 61.4%, respectively.
While Washington and Beijing have agreed to lower tariffs by 115% for 90 days and are aiming for a series of negotiations to avoid any escalation in the trade war, Fed officials believe that the current rate of tariffs is still high enough to prompt inflation.
Earlier this week, Chicago Fed Bank President Austan Goolsbee said, “Tariffs are still three to five times higher than what they were before, so it is going to have a stagflationary impulse on the economy. It’s going to make growth slower and make prices rise.”
Daily digest market movers: EUR/USD gains at USD’s expense
- EUR/USD moves higher at the expense of the US Dollar. The Euro (EUR) is broadly steady against its peers on Friday, while traders remain increasingly confident that the European Central Bank (ECB) will reduce interest rates again in the monetary policy meeting next month.
- Factors contributing to solid ECB dovish bets are confidence that the Eurozone inflation is on track to return to the central bank’s target of 2% this year, and the economic outlook is grim due to global uncertainty.
- Several ECB officials have argued in favor of continuing interest rate reduction. During European trading hours, ECB Governing Council member Martins Kazaks guided a dovish monetary policy outlook by saying that there may still be a “couple” of reductions in the deposit rate this year from its current level of 2.25%, Bloomberg reported. However, Kazaks cautioned that policymakers shouldn’t hurry and adopt a “meeting by meeting” approach amid the unclear global trade situation.
- On the economic front, Eurozone Q1 Gross Domestic Product (GDP) data has been revised lower, while Employment Change has held up. The data showed on Thursday that the Eurozone economy grew at a slower pace of 0.3%, compared to the preliminary estimate and the prior release of 0.4%. Year-on-year, the GDP growth remained 1.2%, as expected. Meanwhile, the Employment Change in the January-March period has come in higher at 0.3% quarter-on-quarter, compared to flash estimates and the former reading of 0.1%.
Technical Analysis: EUR/USD moves higher to near 1.1200
EUR/USD rises to near 1.1200 on Friday. However, the near-term outlook of the pair is still uncertain as the 20-day Exponential Moving Average (EMA) is acting as a key barrier around 1.1210.
The 14-period Relative Strength Index (RSI) recovers strongly to 50.00 after sliding to near 40.00, suggesting indecisiveness among traders.
Looking up, the April 28 high of 1.1425 will be the major resistance for the pair. Conversely, the March 18 high of 1.0955 will be a key support for the Euro bulls.
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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