EUR/USD drifts higher above 1.1650 as US CPI data support Fed rate cut bets
- EUR/USD rises to near 1.1685 in Wednesday’s Asian session.
- Investors expect imminent Fed cuts next month, which in turn drags on the US Dollar.
- The ZEW Survey of Expectations for August from the Eurozone and Germany came in weaker than expected.
The EUR/USD pair gains momentum to around 1.1685 during the Asian trading hours on Wednesday. The US Dollar (USD) weakens against the Euro (EUR) amid rising bets of a Federal Reserve (Fed) rate cut in September. The speeches from Fed officials will be in the spotlight later on Wednesday, with Austan Goolsbee and Raphael Bostic set to speak.
Tame reading on US inflation boosts expectations of a Fed rate cut next month, weighing on the Greenback. US inflation, as measured by the Consumer Price Index (CPI), stayed unchanged at 2.7% YoY in July, the US Bureau of Labor Statistics (BLS) reported on Tuesday. This figure came in below the market expectation of 2.8%. The core CPI, which excludes the volatile energy and food industries, rose by 3.1% YoY in July versus 2.9% seen in June and above the market consensus of 3.0%.
Concerns over Fed independence contribute to the USD’s downside. White House spokeswoman Karoline Leavitt said on Tuesday that the US President Donald Trump was considering a lawsuit against Fed Chair Jerome Powell about his management of renovations at the Fed's Washington headquarters.
Across the pond, the downbeat ZEW Survey of Expectations for August from the Eurozone and Germany might cap the upside for the major pair. The Eurozone ZEW Economic Sentiment plunged to 25.1 in August from 36.1 in July, while Germany’s ZEW Economic Sentiment fell to 34.7 in August versus 52.7 prior. Both readings came in worse than the estimations.
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.