The euro (EUR) pared some of its early gains against the Swiss franc (CHF) on Monday, as traders digested stronger-than-expected Swiss real retail sales coupled with weak manufacturing signals in the euro zone. At the time of writing, EUR/CHF is trading around 0.9324, retreating from a daily high of 0.9338.
Swiss real retail sales rose 2.7% year-on-year in October, well above the expected 1.2%, indicating a more resilient consumer sector despite the broader slowdown in the Swiss economy. The prior month was also revised higher to 1.8% from 1.5%, adding to the upside surprise.
The latest Eurozone Manufacturing Purchasing Managers’ Index (HCOB) showed that factory activity weakened again in November. The headline index fell to 49.6, down from 50.0 in October and slightly below expectations of 49.7, putting the reading at a 5-month low. The production index also fell to 50.4, its weakest level in nine months and from 51.0 in October.
A deeper look at the report revealed a mixed picture. Spain’s PMI fell to 51.5 from 52.1 in October, the lowest level in two months, although it continued to expand. Italy’s PMI rose to 50.6 from 49.9, reaching a 32-month high and showing one of the strongest improvements in the bloc. The German PMI fell to a nine-month low of 48.2, down from the initial estimate of 48.4.
Looking ahead, traders will focus on a new round of inflation and activity data. A preliminary reading of the euro zone’s core consolidated consumer price index (HICP) is due on Tuesday, while Switzerland will publish its consumer price index (CPI) on Wednesday. The Eurozone calendar also includes the HCOB Composite Purchasing Managers’ Index, the Services PMI, and the Producer Price Index (PPI) on Wednesday.
Frequently asked questions about the euro
The euro is the official currency of the twenty European Union countries that belong to the eurozone. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily trading volume of more than $2.2 trillion per day. The EUR/USD is the most widely traded currency pair in the world, accounting for a 30% discount on 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 euro area. The European Central Bank 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 to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – usually benefit the euro and vice versa. The ECB’s Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone’s national banks and the six permanent members, including the President of the European Central Bank, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is one of the important economic indicators for the euro. If inflation rises beyond expected, especially if it is above the ECB’s 2% target, this forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts usually benefit the euro, because they make the region more attractive as a place for global investors to park their money.
Data releases measure the health of the economy and can affect the euro. Indicators such as GDP, manufacturing and services PMIs, employment, and consumer confidence 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, it may encourage the European Central Bank to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is weak, the euro will likely fall. Economic data for the four largest Eurozone economies (Germany, France, Italy and Spain) are of particular interest, as they represent 75% of the Eurozone economy.
Another important data 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 during a certain period. If a country produces highly desirable exports, its currency will gain value from the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
