EUR/USD extends the rally to near 1.1800 ahead of Eurozone inflation, US ISM PMI data
- EUR/USD extends upside to around 1.1790 in Tuesday’s early European session.
- The US is reportedly seeking narrower deals to secure deals before Trump’s tariff deadline.
- German inflation eased to 2.0% in June, softer than expected.
The EUR/USD pair trades in negative territory near 1.1790 during the early European session on Tuesday. The US Dollar (USD) weakens against the Euro (EUR) amid rising fiscal worries and uncertainty around trade deals. The preliminary reading of the Harmonized Index of Consumer Prices (HICP) for June from the Eurozone and the US ISM Manufacturing PMI will be the highlights later on Tuesday.
The Financial Times reported on Tuesday that US officials are looking for narrower deals to avert the looming reimposition of US tariffs. Four people familiar with the talks said US President Donald Trump’s administration was seeking phased deals with the most engaged countries as they hurried to reach an agreement by the July 9 deadline. The uncertainty around trade agreements continued to weigh on sentiment and exert some selling pressure on the Greenback.
Investors are concerned about the US Senate's attempts to pass Trump's tax cut and spending bill, which faces internal party disagreements over its predicted $3.3 trillion addition to the national debt. Fiscal worries have dampened optimism and contributed to the USD’s downside. This, in turn, acts as a tailwind for the major pair.
Across the pond, preliminary data from the German statistics office Destatis showed on Monday that German inflation, as measured by the Harmonized Index of Consumer Prices (HICP) eased to 2.0% YoY in June from 2.1% in the previous reading. This figure came in softer than the expectation of 2.2%.
On a monthly basis, the HICP rose by 0.1% in June versus 0.2% prior, below the market consensus of 0.3%. The softer-than-expected German inflation readings might cap the upside for the shared currency in the near term.
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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