The EUR/USD currency pair is currently consolidating its robust gains achieved over the past two days, fluctuating within a narrow range during Tuesday’s Asian session. Spot prices are hovering around the 1.1900 mark, just slightly below the peak reached the previous day.
In contrast, the US Dollar (USD) is recovering from significant losses incurred the previous day, where it hit a six-day low. This recovery is viewed as a primary factor acting against the upward momentum of the EUR/USD pair. However, substantial USD appreciation appears unlikely given the prevailing sentiment that the US Federal Reserve (Fed) is expected to lower borrowing costs two more times in the current year. Furthermore, the ongoing risk-on sentiment in the markets is contributing to a limit on the USD’s gains as investors seek higher yields elsewhere.
In another development, Bloomberg News reported that Chinese financial regulators have advised institutions to reduce their holdings of U.S. Treasuries, citing concerns regarding concentration risk and potential market volatility. This advisory comes amidst worries about the independence of the US central bank, a situation that seems to favor bearish sentiment toward the USD.
On the other hand, the European Central Bank (ECB) continues to maintain a relatively hawkish outlook, which is expected to bolster the Euro and support the EUR/USD pair. The ECB has held steady since concluding a year-long series of rate cuts in June, with surprisingly resilient growth alleviating the need for further monetary support. This stands in stark contrast to speculation surrounding additional policy easing by the Fed, indicating that the EUR/USD pair may be poised for continued upward movement. As such, analysts suggest that any potential corrections may present buying opportunities and remain somewhat limited in scope.
Market participants are now awaiting key US economic indicators, including the monthly Retail Sales data and speeches from notable Federal Open Market Committee (FOMC) members, which could influence USD movements. However, attention is particularly focused on the delayed release of the Nonfarm Payrolls (NFP) report, scheduled for Wednesday. Additionally, US consumer inflation figures set for release on Friday are expected to provide further insights into the Fed’s rate-cut trajectory, driving the USD and offering new direction for the EUR/USD pair.
The Euro, used by 20 countries within the Eurozone, stands as the second most actively traded currency globally, following the USD. In 2022, the Euro accounted for 31% of all foreign exchange transactions, with a daily average turnover exceeding $2.2 trillion. The EUR/USD pair itself represents the most traded currency pair worldwide, making up approximately 30% of all transactions.
The ECB, headquartered in Frankfurt, Germany, oversees monetary policy for the Eurozone, primarily aiming to maintain price stability. This entails managing inflation and fostering economic growth, with interest rates serving as its main policy tool. The council convenes eight times a year to make key monetary policy decisions, presided over by the ECB’s President, Christine Lagarde.
Inflation data for the Eurozone, assessed by the Harmonized Index of Consumer Prices (HICP), is a vital metric for the Euro. Should inflation exceed expectations and surpass the ECB’s 2% target, it could compel the ECB to raise interest rates to restore balance, thereby benefiting the Euro. Conversely, weakness in economic data could lead to a decline in the currency’s value.
Key releases such as GDP growth, Manufacturing and Services PMIs, employment statistics, and consumer sentiment surveys significantly influence the Euro, reflecting the economy’s health. A strong economic performance encourages foreign investment and may lead the ECB to increase interest rates, thereby strengthening the Euro. Conversely, weak economic indicators could have the opposite effect.
Another critical data point for the Euro is the Trade Balance, which assesses the difference between export earnings and import expenditures. A positive Trade Balance indicates strong export demand, likely appreciating the Euro, while a negative balance can lead to a depreciation of the currency. The economic data from the Eurozone’s largest economies—Germany, France, Italy, and Spain—holds particular weight, representing around 75% of the Eurozone’s overall economy.
