EUR/USD extends upside above 1.0900 as weaker NFP data drags US Dollar lower
|- EUR/USD gains traction around 1.0915 in Monday’s early Asian session.
- The weaker-than-expected US Nonfarm Payrolls have undermined the US Dollar (USD).
- Stubborn inflation in the Eurozone raised doubts over market expectations for more ECB rate cuts in 2024.
The EUR/USD pair extends the rally near 1.0915 during the early Asian session on Monday. The uptick of the major pair is bolstered by the softer Greenback after disappointing US employment data. Traders will keep an eye on the HCOB Purchasing Managers Index (PMI) from Germany and the Eurozone, along with the US ISM Services PMI, which is due later on Monday.
Slowed-than-expected job growth and rising unemployment rate in the United States fuelled fears of a broader economic slowdown and weighed on the US Dollar (USD) broadly. Nonfarm Payrolls (NFP) increased by 114,000 for the month in July, down from the downwardly revised 179,000 in June and below the estimate of 185,000, the Labor Department reported on Friday. Additionally, the Unemployment Rate edged higher to 4.3%, its highest since October 2021.
Despite some fear of recession in the US, Federal Reserve (Fed) Chair Jerome Powell noted last week that the central bank's confidence about the “solid” economy and easing inflation data is raising confidence that the Fed could cut rates soon. Financial markets have fully priced in a rate cut of at least 25 basis points (bps) at each of the three remaining Fed meetings this year, according to the CME FedWatch Tool.
Across the pond, the elevated inflation and steady growth in the Eurozone economy pushed back market expectations for more interest rate cuts this year. The headline HICP rose to 2.6% YoY in July, above the economists consensus of 2.4%. The core HICP, which excludes volatile items such as food, energy, alcohol, and tobacco, grew steadily at 2.9% against expectations of 2.8%.
Euro FAQs
The Euro is the currency for the 20 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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