EUR/USD flat lines above mid-1.0900s, investors seem non-committed amid rising trade tensions

EUR/USD attracts some dip-buyers on Monday amid a modest USD weakness.
Bets for aggressive Fed rate cuts, amid recession fears, undermine the buck.
The EU-US trade war concerns and the risk-off mood might cap spot prices.

Haresh Menghani FXStreet

The EUR/USD pair reverses an Asian session dip to the 1.0880 aera and for now, seems to have stalled its retracement slide from the vicinity of mid-1.1100s, or the highest level since September touched last week. Spot prices currently trade around the 1.0960 region, nearly unchanged for the day amid mixed cues.

The US Dollar (USD) struggles to capitalize on Friday's recovery from a six-month low and kicks off the new week on a weaker note amid bets that the US economy could enter a recession and force the Federal Reserve (Fed) to resume its rate-cutting cycle. In fact, the markets are now pricing in the possibility that the Fed will deliver four quarter-basis-points rate cuts in 2025. This, along with the global flight to safety, leads to a further steep decline in the US Treasury bond yields depressed, which, in turn, undermines the USD and lends some support to the EUR/USD pair.

Traders, however, might refrain from placing aggressive bullish bets around the shared currency amid the risk of a further escalation of a trade war between the US and the European Union (EU). The 27-nation bloc faces 25% import tariffs on steel and aluminum and cars, and reciprocal tariffs of 20% for almost all other goods. Furthermore, the European Commission will propose late on Monday a list of US products to be hit with extra duties in response to Trump's levies. This, along with the global carnage, could support the safe-haven buck and cap the EUR/USD pair.

Moving ahead, traders now look forward to the release of German Industrial Production and Trade Balance data, followed by the Eurozone Sentix Investor Confidence. The focus, however, will remain glued to trade-related developments, which will play a key role in influencing the broader risk sentiment and driving the USD demand. This, in turn, might provide some impetus to the EUR/USD pair and assist traders to grab short-term opportunities.

Euro FAQs

What is the Euro?

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%).

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.

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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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