EUR/USD rises toward 1.0850 as traders digest the initial shock of the French election

EUR/USD continues to rise despite the initial surprise from France's election results.
A leftist alliance unexpectedly took the lead and kept Marine Le Pen's far-right party out of the leadership race.
Fed Chair Powell will provide a broad overview of the economy and monetary policy to the US Congress on Tuesday.

Akhtar Faruqui FXStreet

EUR/USD continues its winning streak for the sixth day, trading around 1.0830 during the Asian session on Tuesday. The Euro continues to advance as investors digest the initial shock of France's election results. A surprise leftist alliance has taken the lead, preventing Marine Le Pen's far-right party from dominating the leadership race following a significant upset in previous European Parliamentary elections.

OCBC FX analysts Frances Cheung and Christopher Wong observed that the Euro began the week with a slight decline following unexpected results in the second round of elections. They noted, "A leftist-dominated government was the least anticipated and raised concerns due to potential increases in public spending, which could further strain public finances."

Full article: Hung parliament but with surprise twist – OCBC

The EUR/USD pair gains ground as the US Dollar (USD) struggles due to soft US employment data, leading traders to speculate that the Federal Reserve (Fed) might reduce interest rates in September. The CME's FedWatch Tool indicates that rate markets price in a 76.2% probability of a rate cut in September, up from 65.5% just a week earlier.

Federal Reserve Chairman Jerome Powell will deliver his testimony on "The Semi-annual Monetary Policy Report" to the US Congress on Tuesday. Powell could provide a broad overview of the economy and monetary policy, with his prepared remarks being published ahead of his appearance on Capitol Hill.

On the data front, inflation figures from Germany and the United States (US) are scheduled for publication on Thursday. German Harmonized Index of Consumer Prices (HICP) inflation is anticipated to remain unchanged at 2.5% year-over-year in June. Meanwhile, the US Core CPI is expected to maintain its YoY rate at 3.4%.

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

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.

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