EUR/USD gathers strength above 1.1700 as traders brace for German Retail Sales, CPI releases
- EUR/USD trades in positive territory near 1.1720 in Monday’s early Asian session.
- US Consumer spending unexpectedly fell in May, undermining the US Dollar.
- German Retail Sales and CPI inflation data will be the highlights later on Monday.
The EUR/USD pair extends the rally to around 1.1720 during the early Asian trading hours on Monday, bolstered by a weaker US Dollar (USD). The Greenback weakens against the Euro (EUR) as traders are convinced that the Federal Reserve (Fed) will cut rates at the September meeting. The release of Retail Sales and Consumer Price Index (CPI) data from Germany will be in the spotlight later on Monday.
Data released on Friday showed that US Personal Spending unexpectedly fell in May, the second decline this year. Meanwhile, US Personal income dropped by 0.4% in May, the largest decrease since September 2021. Traders bet that the US central bank will cut rates more times and possibly sooner than previously expected, weighing on the Greenback and creating a tailwind for the major pair.
Across the pond, the European Central Bank (ECB) Governing Council member Klaas Knot said on Friday that the current interest rate is “a good place to be,” adding that at least one more interest rate cut of 25 basis points (bps) is anticipated toward the end of 2025. Following this comment, the swaps market continues to price in just one 25 bps rate reduction from the ECB over the next 12 months, with the policy rate expected to bottom out around 1.75%.
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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