- EUR/USD trades in negative territory around 1.0415 in Wednesday’s early European session.
- Trump tariff threats drag the Euro lower against the USD.
- The ECB is anticipated to cut the interest rates at its January meeting.
The EUR/USD pair drifts lower to around 1.0415 during the Asian trading hours on Wednesday. The Euro (EUR) weakens against the US Dollar (USD) after US President Donald Trump vowed to hit the European Union (EU) with tariffs. Later on Wednesday, traders will keep an eye on the European Central Bank’s (ECB) President Lagarde speech for fresh impetus.
Late Tuesday, Trump said that he would impose 25% tariffs against Canada and Mexico, as well as duties on China and the European Union on February 1. Trump said that the EU and other nations have troubling trade deficits with the US. European Commission president Ursula von der Leyen emphasized the importance of preserving trading relations between the EU and the US. With a trading volume of €1.5 trillion and significant transatlantic investment, "a lot is at stake for both sides.". A stronger USD is another likely outcome of Trump's policies, which could weigh on the shared currency.
Additionally, the dovish expectation from the ECB might contribute to the EUR’s downside. Traders expected the ECB to deliver a rate cut on January 30 and see the benchmark down at 2% by the end of the year. ECB policymaker Boris Vujcic said on Monday that market expectations for ECB interest rate cuts are reasonable and risks around the inflation outlook are broadly balanced.
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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