- EUR/USD hovers around 1.0870, remains on defensive due to multiple headwinds.
- A few ECB policymakers remain comfortable with expectations of two more rate cuts.
- The US Dollar will dance to the tunes of a slew of US data.
The EUR/USD pair trades close to near immediate support of 1.0870 in Monday’s American session. The major currency pair remains on tenterhooks amid increasing speculation the European Central Bank (ECB) will cut interest rates two times more this year and a recovery move in the US Dollar (USD)
ECB policymakers see market speculation for two more rate cuts: one in September and the following in December as appropriate. ECB policymaker Francois Villeroy de Galhau said in an interview on French radio BFM Business, "Market expectations for the path of interest rates seem rather reasonable to me at the moment," Reuters reported.
Last week, the ECB left interest rates unchanged amid concerns that aggressive policy easing could spurt price pressures again. ECB President Christine Lagarde refrained from pre-committing a specific rate-cut path.
This week, investors will focus on the preliminary Eurozone HCOB PMI data for July, which will be published on Wednesday. The report is estimated to show that the Composite PMI expanded to 51.1 from the former release of 50.9 due to growth in activities in manufacturing as well as service sectors.
Meanwhile, the US Dollar recovers its intraday losses that were prompted by growing uncertainty over the United States (US) parliamentary elections. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, hovers near three-day high around 104.40.
This week, the US Dollar will be influenced by the US economic data such as: S&P Global PMI, Q2 Gross Domestic Product (GDP), Durable Goods Orders and the Personal Consumption Expenditure Price Index (PCE) for June.
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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