EUR/USD slips as Eurozone major economies report soft inflation data
- EUR/USD falls to near 1.1370 as major nations in the Eurozone have indicated that price pressures grew moderately.
- The pair falls even as the Eurozone economy rose at a higher-than-expected pace of 0.4% in the first quarter of the year.
- Investors await US Q1 GDP, PCE inflation for March, and ADP Employment Change data for April.
EUR/USD drops to near 1.1370 during European trading hours on Wednesday. The major currency pair is slightly down as the Euro (EUR) trades cautiously amid a slowdown in the preliminary April Consumer Price Index (CPI) data from six German states and in France, as well as stable inflation in Italy and Spain.
Year-on-year inflation data of four German states came in lower than the previous readings, while two states have shown faster price growth. The data suggests that inflation for the whole of Germany, to be published at 12:00 GMT, could also fall. In the same period, France CPI (EU Norm) rose by 0.8%, faster than estimates of 0.7% but lower than the 0.9% growth seen in March. In Italy, inflation remained at 2.1%, while data released Tuesday showed that price growth in Spain was also stable.
Overall, the inflation data from the largest nations of the Eurozone indicate that price pressures have grown moderately. Such a scenario is unfavorable for the Euro as soft inflation data supports market expectations that the European Central Bank (ECB) could continue to cut interest rates.
Traders have almost priced in a 25 basis points (bps) interest rate reduction by the ECB in the June policy meeting. A slew of ECB officials have projected more slowdown in inflation and economic growth in the face of tariffs imposed by the United States (US) on its trading partners.
On Tuesday, ECB executive board member Piero Cipollone warned that lower economic and inflation growth due to the US-led global trade war could have an "unambiguously recessionary effect" on the countries involved, Reuters reported. Cipollone anticipated that the recent increase in trade policy uncertainty could reduce “euro area business investment by 1.1% in the first year and real GDP growth by around 0.2 percentage points in 2025-26".
Data released on early Wednesday showed that for now, the Eurozone economy is broadly holding up. The preliminary Eurozone Q1 Gross Domestic Product (GDP) came in better-than-expected on both a quarterly and annual basis. Eurostat reported that the economy grew by 0.4% quarter-on-quarter, higher than what economists had expected and than the previous reading of 0.2%.
Daily digest market movers: EUR/USD drops as US Dollar gains ahead of key US data
- EUR/USD ticks lower as the US Dollar (USD) edges up during European trading hours. The US Dollar gains slightly ahead of a slew of United States (US) economic data, which will be published in the North American session. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks up to near 99.35.
- Investors will pay close attention to the Q1 GDP, ADP Employment Change for April, and the Personal Consumption Expenditure Price Index (PCE) data for March, which will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
- The US economy is expected to have expanded at a moderate pace of 0.4% on an annualized basis, substantially slower than the 2.4% growth seen in the previous quarter. Meanwhile, the private sector employment and the inflation data are expected to show that labor market conditions and price pressures are cooling down.
- However, the overall outlook of the US Dollar remains grim amid uncertainty over trade relations between the US and China. Market participants have become increasingly confident that the tariff war between the world’s two largest powerhouses will not resolve in the near term, as comments from US Treasury Secretary Scott Bessent have indicated that he wants Beijing to be the one to initiate rolling back additional import duties imposed on Washington. China raised levies on the US by 125% in retaliation for the 145% tariffs imposed by US President Donald Trump.
- On Monday, Scott Bessent said in an interview with CNBC: “I believe that it’s up to China to de-escalate, because they sell five times more to us than we sell to them, and so these 120%, 145% tariffs are unsustainable.”
- Meanwhile, China has listed a number of imports from the US that will be exempted from tariffs, Reuters reported. Investors should not take this move by China as an attempt to de-escalate the trade war, assuming that these products are ones whose substitutes are not currently available in their domestic facilities due to technological or resource limitations.
Technical Analysis: EUR/USD falls to near 1.1370
EUR/USD falls below 1.1400 in Wednesday’s European session. The outlook of the major currency pair remains bullish as the 20-week Exponential Moving Average (EMA) is sloping higher around 1.0890.
The 14-week Relative Strength Index (RSI) climbs to near overbought levels above 70.00 in the weekly chart, which indicates a strong bullish momentum, but chances of some correction cannot be ruled out.
Looking up, the psychological level of 1.1500 will be the major resistance for the pair. Conversely, the July 2023 high of 1.1276 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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