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EUR/USD falls toward 1.1300 as bond market optimism outweighs impact of US-EU tariff delay

  • EUR/USD depreciates as the US Dollar strengthens, as US yields weaken due to Japan’s potential cuts in government debt issuance.
  • The Greenback gains ground ahead of the May 7 FOMC Meeting Minutes release on Wednesday.
  • Trump expressed his satisfaction as the EU is speeding up the process to reach a trade deal with the United States.

EUR/USD continues its losses for the second successive day, trading around 1.1310 during the Asian hours on Wednesday. The pair depreciates as the US Dollar (USD) draws support and as US yields depreciate following Japan’s indication of potential cuts in government debt issuance, which has boosted global bond markets. At the time of writing, the 10- and 30-year yields on US Treasury bonds are standing at 4.46% and 4.97%, respectively.

Additionally, the Greenback received support as the Conference Board's Consumer Confidence Index rose to 98.0 in May from the previous 86.0 reading. Meanwhile, US Durable Goods Orders fell by 6.3% in April against a 7.6% increase prior. This figure came in better than the estimated decrease of 7.9%. Traders likely await the FOMC Minutes, which are due later on Wednesday.

Federal Reserve Bank of New York President John Williams emphasized the importance of inflation expectations should be well anchored. Williams wants to avoid inflation becoming highly persistent because that could become permanent by responding relatively strongly when inflation begins to deviate from the target. On Tuesday, Minneapolis Fed President Neel Kashkari said that policymakers should avoid any adjustment in interest rates until reaching clear estimations of the impact on inflation due to higher tariffs.

However, the risk-sensitive Euro (EUR) gained support as trade tension eased between the United States (US) and the European Union (EU). On Sunday, US President Donald Trump extended the tariff deadline on imports from the EU from June 1 to July 9. On Monday, the Brussels agreed to speed up trade talks with the United States to avoid a transatlantic trade war.

On Tuesday, US President Donald Trump expressed his satisfaction in a post on Truth Social, noting that the EU is accelerating the process towards reaching a trade deal with the United States. Trump wrote, "I was extremely satisfied with the 50% Tariff allotment on the European Union, especially since they were 'slow walking". I have just been informed that the EU has called to quickly establish meeting dates. This is a positive event, and I hope that they will.

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.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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