EUR/USD weakens below 1.1650 as strong US data boosts Fed hold outlook

EUR/USD weakens as strong US data lift expectations that the Fed will hold rates.
US Retail Sales rose 0.6% to $735.9 billion in November, beating expectations after October’s 0.1% decline.
The Euro stays subdued despite cautious ECB remarks on policy outlook.

Akhtar Faruqui FXStreet

EUR/USD extends its losses for the third consecutive session, trading around 1.1640 during the Asian hours on Thursday. The pair loses ground as the US Dollar (USD) advances as a stronger-than-expected United States (US) Producer Price Index (PPI) and Retail Sales, along with last week’s easing Unemployment Rate, reinforced the case for the US Federal Reserve (Fed) to keep interest rates on hold for the coming months. Traders will likely monitor the weekly US Initial Jobless Claims report later in the day.

The US Census Bureau reported on Wednesday that Retail Sales rose more than expected to $735.9 billion in November, up 0.6%, following a 0.1% contraction in October and beating market expectations of a 0.4% increase. Meanwhile, the Producer Price Index (PPI) came in hot in November, with both headline and core measures reaching 3% year-over-year (YoY). In response, Morgan Stanley analysts delayed their expectations for rate cuts to June and September from January and April following Friday’s jobs report.

Minneapolis Fed President Neel Kashkari said at the Midwest Economic Forecast Forum hosted online by the Wisconsin Bankers Association on Wednesday that the overall economy seems quite resilient and that he has seen less tariff pass-through than expected. Kashkari added that inflation is still too high but is moving in the right direction.

The EUR/USD pair weakens as the Euro (EUR) remains subdued despite cautious remarks from European Central Bank (ECB) officials, indicating that the central bank is in a rush to raise interest rates.

European Central Bank Vice President Luis de Guindos said on Wednesday that current market pricing does not fully reflect the high level of global uncertainty, adding that geopolitical risks significantly increase downside risks to growth.

Mārtiņš Kazāks, Governor of the Bank of Latvia and ECB Governing Council member, said risks to the outlook remain balanced, warning that uncertainty is still elevated, including the potential for non-linear shocks. He added that the ECB is delivering on its inflation mandate and remains in a solid position.

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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