The EUR/USD pair continues its losses for the third session in a row, trading around the 1.1640 level during the Asian hours on Thursday. The pair is losing ground as the US Dollar (USD) strengthens as the Producer Price Index (PPI) and stronger than expected US (US) retail sales, coupled with a drop in the unemployment rate last week, strengthen the case for the US Federal Reserve (Fed) to keep interest rates unchanged for the coming months. Traders will likely be watching the US weekly initial jobless claims report later in the day.
The U.S. Census Bureau reported Wednesday that retail sales rose more than expected to $735.9 billion in November, up 0.6%, after a 0.1% contraction in October and beating market expectations for a 0.4% increase. Meanwhile, the Producer Price Index (PPI) came in hot in November, with key and core metrics hitting 3% year-on-year. In response, Morgan Stanley analysts pushed back their rate cut expectations to June and September from January and April after Friday’s jobs report.
The overall economy appears quite resilient, and it has seen less tariffs pass through than expected, Minneapolis Fed President Neel Kashkari said at a Midwest Economic Outlook Forum hosted online by the Wisconsin Bankers Association on Wednesday. Kashkari added that inflation is still very high but is moving in the right direction.
The EUR/USD pair weakens as the euro remains weak despite dovish comments from European Central Bank (ECB) officials, which suggest the central bank is in a hurry to raise interest rates.
Current market pricing does not fully reflect the high level of global uncertainty, European Central Bank Vice President Louis de Guindos said on Wednesday, adding that geopolitical risks significantly increase downside risks to growth.
Risks to the outlook remain balanced, said Martis Kasacs, Governor of the Bank of Latvia and member of the Governing Council of the European Central Bank, warning that uncertainty remains high, including the possibility of non-linear shocks. He added that the ECB is implementing its mandate on inflation and remains in a strong position.
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.
