EUR/USD extends the rally above 1.1750 ahead of ECB rate decision
- EUR/USD gathers strength to near 1.1775 in Thursday’s early European session.
- EU and US move closer to a trade deal as the tariff deadline looms.
- The ECB is anticipated to leave interest rates unchanged for the first time in more than a year.
The EUR/USD pair extends its upside to around 1.1775 during the early European session on Thursday. The Euro (EUR) edges higher against the US Dollar (USD) amid hope for the European Union (EU) and the United States (US) trade deal. All eyes will be on the European Central Bank (ECB) later on Thursday, with no change in rate expected.
The EU and the US are moving toward a trade agreement that could include a 15% US baseline tariff on EU goods and possible exemptions. Optimism surrounding the trade deal provides some support to the shared currency. European trade negotiators were trying to negotiate a deal to avoid the 30% tariff rate that Trump has announced he would slap on imports from the EU on August 1.
Nonetheless, the bloc plans 93 billion euros in counter-tariffs if no deal is reached, which might escalate trade tensions. Any signs of negative developments surrounding US-EU trade talks could exert some selling pressure on the EUR against the USD.
The ECB is expected to leave the deposit rate unchanged at 2.0% at its July meeting on Thursday as policymakers await clarity on what US President Donald Trump’s tariffs will do to inflation. ECB President Christine Lagarde is likely to keep all options on the table during the press conference. Any hawkish comments from ECB policymakers could underpin the EUR in the near term.
Later on Thursday, the preliminary reading of US Purchasing Managers Index (PMI) data for July will be in the spotlight. Also, the weekly US Initial Jobless Claims, New Home Sales, and the Chicago Fed National Activity Index will be released later on the same day.
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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