EUR/USD holds gains above 1.1750 following US-EU trade agreement
- EUR/USD appreciates as United States and European Union reached a trade agreement, easing fears of a broader trade conflict.
- The US and EU have set a blanket 15% tariff on goods traded between them, taking effect on August 1.
- The Fed is expected to hold its benchmark interest rate steady between 4.25% and 4.50% on Wednesday.
EUR/USD gains ground after registering losses in the previous two sessions, trading around 1.1770 during the Asian hours on Monday. The pair appreciates as the Euro (EUR) receives support as the United States (US) and European Union (EU) reached a trade agreement over the weekend, easing fears of a broader trade conflict.
The two economies have reached a framework trade agreement on Sunday that sets a blanket 15% tariff on goods traded between them, taking effect on August 1. This deal has ended a months-long stand-off, per Bloomberg.
European Commission President Ursula von der Leyen said on Sunday that the bloc agreed not to impose retaliatory tariffs and pledged $600 billion in investment in the US on top of existing expenditures.
The European Central Bank (ECB) left interest rates unchanged last week, stating that disinflation is progressing in line with its earlier projections. The ECB emphasized the need for additional data on economic developments before providing further clarity on its policy outlook.
Traders expect the US Federal Reserve (Fed) to hold its benchmark interest rate steady between 4.25% and 4.50% at its July meeting on Wednesday. The FOMC press conference will be observed for any signs that rate cuts may start in September. Markets have priced in nearly a 62% odds of a rate cut in September, according to the CME Group's FedWatch tool.
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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