EUR/USD holds below 1.1000 ahead of Eurozone GDP, US CPI data
|- EUR/USD trades flat near 1.0990 in Wednesday’s early European session.
- The US PPI rose 2.2% year-on-year in July, softer than expected.
- ECB is likely to deliver two more 25 basis point rate cuts this year, according to Reuters surveys.
The EUR/USD pair trades on a flat note near 1.0990 during the early European session on Wednesday. Traders prefer to wait on the sidelines ahead of the release of top-tier economic data from the Eurozone and the US. The Eurozone Gross Domestic Product (GDP) for the second quarter (Q2) and the US Consumer Price Index (CPI) for July will be closely watched.
Data released by the Bureau of Labor Statistics on Tuesday showed that the Producer Price Index (PPI) for final demand in the US rose 2.2% YoY in July from 2.7% in the previous month, below the 2.3% expected. The monthly PPI increased by 0.1% MoM in the same period after rising by 0.2% in June. The Core PPI, which excludes volatile food and energy prices, rose 2.4% YoY in July, compared to 3.0% in June, lower than the market consensus of 2.7%.
The markets expect a 25 basis point (bps) rate cut by the Federal Reserve (Fed) in September, while a 50 bps cut in September cannot be ruled out, but it will depend entirely on the data. Atlanta Fed President Raphael Bostic emphasized on Tuesday that recent economic data made him "more confident" that the Fed can get inflation back to its 2% target. Still, more evidence is needed before he's ready to support lowering interest rates.
Across the pond, the Eurozone economy is estimated to grow 0.3% QoQ and 0.6% YoY in Q2. The weaker-than-expected GDP growth numbers could weigh on the Euro (EUR) against the US dollar (USD).
According to Reuters, the majority of economists polled see the European Central Bank (ECB) cutting its deposit rate twice more this year, in September and December. The anticipation that the ECB will cut rates fewer than markets previously expected is likely to cap the downside for the Euro for the time being. ING chief Eurozone economist, Carsten Brzeski, noted, "I expect the ECB to slightly revise upward its inflation projections, and it's strange then to continue cutting rates.”
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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