- EUR/USD trades with a mild negative bias around 1.0950 in Tuesday’s early European session.
- Fed’s Goolsbee said the central bank could take action if the economy deteriorated.
- Traders await the Eurozone Retail Sales on Tuesday for fresh impetus, which is expected to ease to 0.1% YoY in June.
The EUR/USD pair trades with mild losses around 1.0950 during the early European trading hours on Tuesday. The improved risk sentiment provides some support to the Greenback and caps the major pair’s upside. Traders will take more cues from the release of Eurozone Retail Sales, which is expected to ease to 0.1% YoY in June.
The sell-off spread across the financial markets on Monday as investors were concerned about the recession in the US economy. This, in turn, dragged the US Dollar (USD) lower to the year-to-date lows near 102.15. However, a turnaround in the global risk sentiment alleviates some fears in the market. “Markets panicked after the U.S. employment report on Friday,” said Andrzej Szczepaniak, an economist at Nomura. Traders are now pricing in around 60% odds of emergency easing by the US Federal Reserve (Fed).
On Monday, Chicago Fed President Austan Goolsbee noted that the Fed would respond if economic or financial conditions deteriorate. Any comments from Fed officials about earlier rate cuts might undermine the USD in the near term.
On the bright side, the US ISM Service Purchasing Managers Index (PMI) came in stronger than expected, rising to 51.4 in July from 48.8 in June, data released by the Institute for Supply Management (ISM) showed Monday.
Apart from a possible emergency Fed rate cut. Investors expect the European Central Bank (ECB) to reduce interest rates by 0.5 percentage points at its next meeting in September. The Eurozone Retail Sales on Tuesday might offer some hints about the economic condition in the Eurozone and the path of the ECB rate cut. In case of the stronger-than-expected readings, this could lift the Euro (EUR) against the USD.
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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