EUR/USD tumbles to near 1.0200 on stronger US Dollar
- EUR/USD loses traction to near 1.0215 in Monday’s early European session, down 0.30% on the day.
- The US labor market data boost the USD and act as a headwind for the pair.
- The ECB's dovish bets contribute to the EUR’s downside.
The EUR/USD pair trades in negative territory for the fifth consecutive day around 1.0215 during the early European session on Monday. The US Dollar (USD) gathered strength on the upbeat US employment data for December, which is likely to support the US Federal Reserve's (Fed) stance to keep interest rates steady in January.
The US job growth unexpectedly rose in December while the unemployment rate fell to 4.1%, supporting the Greenback. Markets expect the Fed to hold the interest rate at the January meeting, with futures pricing after the employment report swinging to the expectation of just one rate cut this year. According to the CME FedWatch tool, traders have priced in odds of a single cut increased to 68.5% after the jobs report.
"The solid nonfarm payroll gain and decent earnings growth will keep the U.S. economic expansion on a sturdy foundation to start the year, and that will likely keep the Fed on the sidelines at the January meeting,” noted Scott Anderson, chief U.S. economist at BMO Capital Markets.
Across the pond, the dovish expectations from the European Central Bank (ECB) might weigh on the Euro (EUR) against the USD. Investors anticipate four interest rate reductions by the ECB, which are expected to occur at each meeting by summer. ECB policymaker François Villeroy said on Wednesday that while price pressures were projected to rise slightly in December, interest rates would continue progressing toward the neutral rate “without a slowdown in the pace by summer.”
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
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
