EUR/USD weakens below 1.0400 as traders brace for US PCE release

EUR/USD trades in negative territory near 1.0390 in Friday’s early European session, losing 0.16% on the day.
The threat of escalating tariffs drags the Euro lower against the US Dollar.
Fed officials signaled interest rates likely on hold for a while.

Lallalit Srijandorn FXStreet

The EUR/USD pair remains under selling pressure near 1.0390 during the early European trading hours on Friday. The Euro (EUR) weakens against the US Dollar (USD) amid the risk-off mood. The US Personal Consumption Expenditures (PCE) Price Index will take center stage later on Friday.

US President Donald Trump said late Thursday that 25% duties on imports from Canada and Mexico will come into effect on March 4, not April 2, as he had suggested the day prior. Trump further stated that goods from China will be subject to an extra 10% duty. He also this week promised 25% tariffs on shipments from the European Union. Tariff uncertainty from Trump is likely to weigh on the shared currency in the near term.

Cleveland Fed President Beth Hammack said on Thursday she expects US central bank interest rate policy to be on hold for the time being amid a hunt for evidence that inflation pressures are easing back to the 2% goal. Meanwhile, Atlanta Fed President Raphael Bostic said late Wednesday that the Fed should hold interest rates where they are, at a level that continues to put downward pressure on inflation. The cautious stance of the Fed might lift the Greenback and act as a headwind for EUR/USD.

The US PCE inflation data for January will be in the spotlight later on Friday. This report could influence market speculation for the Federal Reserve's (Fed) monetary policy outlook. Any signs of softer inflation in the US economy could undermine the USD and help limit the pair’s losses. Financial markets are now pricing in nearly 68% odds that the Fed will cut its interest rate in the June policy meeting after holding them in the March and May meetings, according to the CME FedWatch tool.

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.

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.

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