Euro declines to near 1.1400 as softer German inflation undercuts ECB hike bets
- EUR/USD edges lower to around 1.1410 in Wednesday’s early Asian session.
- Cooling inflation in Germany has lowered expectations for ECB rate hikes.
- The US economy remains resilient, giving the Fed ample room to maintain its hawkish monetary policy stance.
The EUR/USD pair loses momentum to near 1.1410 during the early Asian trading hours on Wednesday, pressured by receding bets for aggressive tightening by the European Central Bank (ECB). Traders will take more cues from the preliminary reading of the Harmonized Index of Consumer Prices (HICP) from the Eurozone and US Manufacturing Purchasing Managers Index (PMI) report, which are due later in the day.
Signs of easing price pressures across major European economies like Germany, France, and Italy have reduced expectations for restrictive ECB policy, weighing on the Euro (EUR) against the US Dollar (USD). Data released by federal statistics agency Destatis on Tuesday showed that Germany’s Consumer Price Index (CPI) inflation fell to 2.3% in June, down from 2.6% in May. This figure came in softer than the market expectations of 2.5%.
"It makes an ECB hold in July all but certain, unless oil prices stage a spectacular rebound before the meeting," said Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics.
ECB President Christine Lagarde last week said that there was no need for "forceful" action, citing falling energy prices and the lack of "second-round" effects like higher wage demands that could further stoke inflation.
On the other hand, the US Federal Reserve (Fed) held its benchmark interest rate steady in a target range of 3.50% to 3.75% at its June policy meeting. The central bank's update also removed a statement hinting that it was leaning towards lowering interest rates in the future. Fed funds futures have priced in nearly a 63% chance of a rate hike by September, according to the CME FedWatch tool.
Euro FAQs
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%).
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.
