Euro drifts toward the bottom of its range as US rate bets climb
- EUR/USD loses most of Monday's gain, dipping to just below 1.1150.
- The Fed's lead over the ECB's 2.50% deposit rate could reach two points.
- ECB President Lagarde speaks twice before Friday's Eurozone GDP figures.
Five weeks into a 1.1100-1.1300 range, the Euro is still inside it after US consumer prices beat forecasts, though back in the lower half. It dropped to just below 1.1150, giving back nearly all of Monday's climb, and has edged back above that level.
Core US consumer prices rose 0.3% in October against a 0.2% forecast. Dallas Fed President Logan said two more quarter-point hikes are needed before a pause, and traders give a second one by January about 74%. Two hikes would put US rates 1.75-2.00 percentage points above the European Central Bank (ECB) deposit rate of 2.50%, unless the ECB hikes too.
ECB Chief Economist Lane said he'd set a high bar for signalling where ECB rates go next, on a day two Fed officials put a size on theirs. Eurozone inflation hit a three-year high of 4% in October, and money markets price two ECB hikes by mid-2027, which would narrow that gap for the Euro.
On the calendar
ECB President Lagarde speaks at 09:45 GMT on Wednesday and 19:30 GMT on Thursday, and ECB Executive Board member Schnabel at 07:10 GMT on Friday. Friday also brings updated Eurozone Gross Domestic Product (GDP) for the third quarter at 10:00 GMT, forecast at 0.4% growth, the same as the first reading. ECB President Lagarde's remarks and that figure bear on whether the ECB hikes in December too.
In the US, Cleveland Fed President Hammack, a voter this year, speaks on Thursday at 14:00 GMT. Friday's core producer price figure at 13:30 GMT is forecast to hold at 5% from a year earlier, as in September, with the Fed's December 9 hike already priced.
On the charts
The Euro moved into this range after a drop of about 5% from its late-August high near 1.1700. It has turned lower just short of the top repeatedly, most recently on November 5, and its October 14 and October 29 lows held just above the bottom.
EUR/USD daily chart
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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