EUR/USD consolidates around 1.0900, bullish bias remains ahead of key US data

EUR/USD edges lower during the Asian session amid a modest USD uptick.
The divergent Fed-ECB policy outlooks might continue to support the pair.
Traders now look to the US Retail Sales and Fed speak for a fresh impetus.

Haresh Menghani FXStreet

The EUR/USD pair is seen consolidating its strong gains registered over the past two days and oscillating in a narrow band during the Asian session on Tuesday. Spot prices currently trade around the 1.1900 mark, just below an over one-week high touched the previous day.

The US Dollar (USD) recovers a part of the previous day's heavy losses to a six-day low and turns out to be a key factor acting as a headwind for the EUR/USD pair. Any meaningful USD appreciation, however, seems elusive in the wake of the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times this year. Furthermore, the prevailing risk-on environment might contribute to capping the safe-haven Greenback.

Meanwhile, Bloomberg News reported on Monday that Chinese regulators have advised financial institutions to curb holdings of U.S. Treasuries due to concern over concentration risk and market volatility. This comes amid concerns about the US central bank's independence, which, in turn, favors the USD bears. Apart from this, the European Central Bank's (ECB) relatively hawkish outlook should benefit the Euro and further support the EUR/USD pair.

In fact, the ECB has been on hold since ending a year-long run of rate cuts in June, and surprisingly resilient growth has taken all pressure off policymakers to provide any further support. This marks a significant divergence in comparison to bets for further policy easing by the Fed and suggests that the path of least resistance for the EUR/USD pair is to the upside. Hence, any corrective pullback could be seen as a buying opportunity and remain limited.

Market participants now look forward to the US monthly Retail Sales data, which, along with speeches from influential FOMC members, could influence the USD. The focus, however, will remain glued to the delayed release of the US Nonfarm Payrolls (NFP) report on Wednesday. Apart from this, the latest US consumer inflation figures on Friday would offer cues about the Fed's rate-cut path, which will drive the USD and provide a fresh impetus to the EUR/USD pair.

Euro FAQs

What is the Euro?

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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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