- EUR/USD gains ground to around 1.0450 in Friday’s early European session, adding 0.30% on the day.
- Trump said he will demand lower interest rates.
- ECB is expected to cut the deposit rate on January 30.
The EUR/USD pair attracts some buyers to 1.0450 during the early Asian session on Friday, bolstered by the weakening of the US Dollar (USD). The preliminary reading of the HCOB Purchasing Managers Index (PMI) for January from the Eurozone and Germany will be released later on Friday. On the US docket, flash S&P PMI for January will take center stage.
US President Donald Trump’s remarks at the World Economic Forum in Davos drag the USD lower against a basket of major currencies. Trump said late Thursday that he wants to see interest rates drop immediately, and likewise, they should be dropping all over the world.
"It seems like the markets are more concerned about rate cuts and any kind of greater indicator that there'll be more rate cuts,” said David Eng, Investment Adviser at Sonora Wealth Group in Vancouver.
Across the pond, recent comments from the European Central Bank (ECB) policymakers indicated that a rate cut was likely. ECB Croatian central bank chief Boris Vujcic said earlier this week that market expectations for ECB interest rate cuts are reasonable and risks around the inflation outlook are broadly balanced.
Meanwhile, ECB President Christine Lagarde emphasized on Wednesday that the central bank is “not overly concerned” about the risk of inflation from abroad and will continue to reduce interest rates at a gradual pace. Markets have priced in nearly 96% odds the ECB will reduce the rates at the upcoming meeting.
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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