EUR/USD gains as US Dollar corrects, Eurozone HICP accelerates in April
- EUR/USD rebounds above 1.3300 as the US Dollar retraces ahead of the US NFP data for April.
- Flash Eurozone HICP shows that inflationary pressures grew at a faster-than-expected pace in April.
- China has demonstrated openness to discuss bilateral trade with Washington.
EUR/USD holds initial gains to near 1.3300 in Friday’s European session. The major currency remains firm near the day’s high after the release of the hotter-than-expected preliminary Eurozone Harmonized Index of Consumer Prices (HICP) data for April.
The Eurostat reported that the core HICP – which excludes volatile components like food, energy, alcohol, and tobacco – grew at a faster pace of 2.7% compared to estimates of 2.5% and the March reading of 2.4%. In the same period, the headline HICP rose steadily by 2.2% on year, faster than estimates of 2.2%. Month-on-month headline and core HICP rose steadily by 0.6% and 1.0%, respectively.
The impact of the hot inflation figures is expected to be limited on market expectations for the European Central Bank’s (ECB) monetary policy outlook as officials are more concerned over the economic slowdown in the face of additional tariffs imposed by United States (US) President Donald Trump, with confidence over price pressures returning to the central bank’s target of 2% this year.
Traders have priced in a 25 basis points (bps) interest rate reduction by the ECB in the June policy meeting as officials have expressed downside risks to Eurozone inflation.
Earlier this week, ECB policymaker and Finnish central bank governor Olli Rehn supported the need for further monetary policy expansion and expressed concerns about deepening risks to Eurozone inflation undershooting the central bank’s target of 2% in the face of Trump’s tariffs
Olli Rehn didn’t rule out the possibility of interest rates sliding below the neutral rate. "We must analyse all options with an open mind and not a priori rule out rate cuts below the neutral rate, Rehn said in an event, Reuters reported.
Daily digest market movers: EUR/USD gains at USD's expense
- EUR/USD gains at the expense of the US Dollar (USD). The USD corrects despite an increase in hopes of easing trade tensions between the US and China. Investors have become increasingly confident of a de-escalation in the Sino-US trade war after comments from the Chinese Commerce Ministry on Thursday signaled their willingness to initiate trade talks with Washington.
- China says the door is open to trade talks with the US and urged the US to demonstrate sincerity if it wants trade talks,” Bloomberg reported. From Washington, US President Donald Trump has also expressed confidence that the US will reach a deal with China. “There’s a very good chance we’re going to make a deal, but we’re going to make it on our terms,” Trump said in an interview at NewsNation Town Hall on Thursday and added that the White House can “announce potential trade deals with South Korea, Japan, and India”.
- Technically, this scenario is favorable for the US Dollar as it diminishes fears of a decline in households’ purchasing power. Investors anticipated that US employers would pass on the burden of higher tariffs to customers, which would diminish their spending capacity. However, the USD is trading lower amid caution ahead of the United States (US) Nonfarm Payrolls (NFP) data for April, which will be published at 12:30 GMT.
- Economists expect US employers to have hired 130K fresh workers, significantly lower than the March reading of 228K. The Unemployment Rate is seen as steady at 4.2%. Investors will also focus on the Average Hourly Earnings data, a key measure of wage growth, which is expected to have grown steadily by 0.3% on month. Year-on-year, the wage growth measure is expected to have risen at a faster pace of 3.9% compared to the prior release of 3.8%
- The US inflation data will significantly influence market expectations for the Federal Reserve’s (Fed) monetary policy announcement in the June meeting. According to the CME FedWatch tool, there is a 58.6% chance that the central bank will reduce interest rates in June after leaving them unchanged in the range of 4.25%-4.50% in May.
Technical Analysis: EUR/USD climbs above 1.1300
EUR/USD returns above the key level of 1.1300 on Friday from its two-week low of 1.1265 posted on Thursday. The major currency pair rebounded after attracting bids near the 20-day Exponential Moving Average (EMA) around 1.1260.
The 14-day Relative Strength Index (RSI) falls inside the 40.00-60.00 range, indicating that the bullish momentum is concluded for now. However, the upside bias still prevails.
Looking up, the psychological level of 1.1500 will be the major resistance for the pair. Conversely, the 25 September high of 1.1214 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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