EUR/USD remains depressed below mid-1.1700s amid trade concerns, stronger USD
- EUR/USD trades with a mild negative bias amid some follow-through USD buying.
- Trade-related uncertainties weigh on the Euro and also contribute to the downtick.
- The mixed fundamental backdrop warrants caution for aggressive bearish traders.
The EUR/USD pair ticks lower for the second consecutive day on Friday and moves away from a nearly three-week top touched the previous day. Spot prices, however, lack follow-through selling and currently trade around the 1.1740 region, down less than 0.10% for the day.
Despite the European Central Bank's (ECB) on-hold rate decision on Thursday, the shared currency, so far, has been struggling to attract any meaningful buyers amid persistent trade-related uncertainties. White House spokesman Kush Desai said that any talk about a deal between the US and the European Union (EU) should be seen as speculation unless it is confirmed by President Donald Trump. This overshadows media reports that the EU-US trade agreement is nearing completion, which, in turn, is seen undermining the Euro and weighing on the EUR/USD pair.
The US Dollar (USD), on the other hand, is gaining positive traction for the second straight day as the US macro data released on Thursday reaffirmed the view that the Federal Reserve (Fed) will hold interest rates at the July 30 meeting. The US Initial Jobless Claims fell to 217K last week, or the lowest reading since mid-April, while the S&P Global's US Composite PMI pointed to continuous expansion in the business activity for the 30th straight month. This might further force the Fed to maintain the status quo, which benefits the USD and undermines the EUR/USD pair.
Meanwhile, Trump dialed up the pressure on Fed Chair Jerome Powell to lower borrowing costs during a rare presidential visit to the central bank's headquarters. Adding to this, fears that the central bank's independence could be under threat on the back of mounting political interference might hold back the USD bulls from placing aggressive bets. Furthermore, the upbeat market mood might continue to cap any further USD appreciation and offer some support to the EUR/USD pair, warranting some caution before confirming that spot prices have topped out.
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.