EUR/USD strengthens above 1.1550 despite French political crisis
- EUR/USD recovers to near 1.1575 in Friday’s Asian session.
- Lingering political uncertainty in France could weigh on the Euro.
- Traders brace for a breakthrough on the ongoing US government shutdown.
The EUR/USD pair gains ground around 1.1575, snapping the four-day losing streak during the Asian trading hours on Friday. The potential upside for the major pair might be limited as the political turmoil in France weighed on the Euro (EUR). The preliminary reading of the U-Mich Consumer Sentiment report will be in the spotlight later on Friday.
French President Emmanuel Macron will name a new Prime Minister by Friday evening, per the Guardian. France’s longstanding political crisis deepened this week when the Prime Minister, Sébastien Lecornu, resigned after 27 days in office. "In France, turmoil following the resignation of Prime Minister Lecornu has undermined EUR sentiment," said Kieran Williams, head of Asia FX at InTouch Capital Markets.
Across the pond, the US government shutdown entered its tenth day on Friday as the Senate rejected funding bills from lawmakers that had the potential to bring the shutdown to an end. The shutdown has caused a delay in official US economic data, which complicates the Federal Reserve’s (Fed) decision-making on interest rates. Concerns over a prolonged US federal shutdown could undermine the Greenback and create a tailwind for the major pair.
New York Fed President John Williams said on Thursday that he would be comfortable with cutting interest rates again. Meanwhile, San Francisco Fed President Mary Daly noted on Friday that inflation has come in much less than she had feared, adding that the US central bank is projecting additional cuts in risk management.
Money markets are currently pricing in a 95% probability of the central bank cutting its key interest rate again in the October policy meeting, according to the CME’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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