Euro gains support amid hawkish ECB expectations, subdued US Dollar
- Euro gains as rising oil prices, bond yields, and Middle East tensions drive expectations for a September ECB rate hike.
- US Dollar remains under pressure as Treasury's plan to double long-term bond buybacks.
- Markets await US consumer confidence, PCE inflation data, and Fed Chair Kevin Warsh's Jackson Hole speech.
EUR/USD inches higher after posting minor losses in the previous day, trading around 1.1670 during the Asian hours on Tuesday. The pair finds support as rising oil prices, elevated bond yields, and escalating Middle East tensions drive Eurozone inflation concerns. These factors have boosted expectations for a more hawkish stance from the European Central Bank (ECB), which is widely anticipated to deliver a 25-basis-point rate hike in September following its June tightening.
Meanwhile, sovereign yields on longer-maturity Eurozone securities remain near multi-decade highs. They are tracking US yield movements driven by worries over Washington’s deficit spending and fears that the Federal Reserve (Fed) may be taking a complacent approach to persistent inflation.
Strategists at Scotiabank note that the flow of macro news has been relatively light, with "fundamental releases have been limited" ahead of what they describe as this week’s key event: "the German IFO business sentiment figures scheduled for Tuesday." They add that shifting rate dynamics are weighing modestly on the single currency, as "yield spreads have pulled back slightly, eroding some of the EUR’s support as US Treasury yields have climbed over the past week or so."
Meanwhile, the US Dollar (USD) remains under pressure after the US Treasury decided to double its buyback operations for longer-dated bonds. Reports indicate that US Treasury Secretary Scott Bessent could utilize nearly $1 trillion from the Treasury General Account to fund these operations. Tensions are also escalating geopolitically, as the US expands secondary sanctions against entities doing business with Iran. Secretary Bessent warned that a major financial institution could face sanctions this week, explicitly noting that China will not be exempt.
Looking ahead, market participants are focused on key US economic events scheduled for this week. Consumer confidence data will be released on Tuesday, followed by the Personal Consumption Expenditures (PCE) price index on Wednesday. Additionally, Federal Reserve Chair Kevin Warsh is set to deliver a speech on Friday at the annual Jackson Hole symposium, which could offer further direction for the Greenback.
Strategists at Scotiabank highlight that the “calendar and event risk this week is significant,” noting that the combination of key data releases and policy signals is encouraging investors to reassess exposures. In their view, this backdrop creates “the potential for some moderate gains in the USD broadly in the short run” as market participants “pare back positioning,” with the Dollar benefiting from a more cautious stance ahead of the upcoming risk events.
Euro FAQs
The Euro is the currency for the 20 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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