EUR/USD rebounds from 1.1600 despite market caution ahead of US PPI data
- EUR/USD may lose ground as the US Dollar holds ground ahead of Producer Price Index data due on Wednesday.
- The Trump administration is set to impose a tariff of "a little over 10%" for those smaller countries.
- EU officials have confirmed that negotiations to avoid US tariffs are still underway, though a retaliatory package is being prepared.
EUR/USD halts its five-day losing streak, trading around 1.1610 during the Asian hours on Wednesday. The pair appreciates despite the stable US Dollar (USD), driven by traders’ caution ahead of the upcoming US Producer Price Index (PPI) later on Wednesday. The Fed Beige Book and Industrial Production will also be eyed.
However, the US Dollar may regain its ground as the US inflation report for June reignited concerns about prolonged high Federal Reserve (Fed) interest rates. The US Consumer Price Index (CPI) rose 2.7% year-over-year in June, matching market expectations. Core CPI came in at 2.9%, just below the 3.0% forecast but still notably above the Federal Reserve’s 2% target.
The market sentiment remains cautious amid rising uncertainty surrounding the tariff outlook. US President Donald Trump sent notified 25 countries of new tariff rates set to take effect on August 1st, including major trading partners Canada, Mexico, and the European Union (EU). However, Trump expressed willingness to further engage in trade discussions, indicating the possibility of negotiating with the European Union (EU) and other key trading partners.
On Tuesday, Trump indicated that send tariff letters soon to smaller countries, including nations in Africa and the Caribbean, per Reuters. Trump further stated that his administration would likely set a tariff of "a little over 10%" for those countries.
Trump’s letter, noting a 30% import tariff to the European Union, has raised concerns at the European Central Bank (ECB), which is now expected to present a more pessimistic outlook next week than it did in June. Despite this, traders remain confident that the ECB will keep interest rates unchanged at its upcoming meeting.
Meanwhile, EU officials have confirmed that negotiations to avoid tariffs are still ongoing. However, a retaliatory package is being prepared nonetheless, potentially targeting up to €72 billion worth of US goods with tariffs, targeting aircraft and alcohol.
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
FXStreet
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.
