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Euro gathers strength above 1.1400 after soft US inflation data

  • EUR/USD edges higher to around 1.1425 in Wednesday’s early Asian session. 
  • US CPI increased 3.5% YoY in June, cooler than expected. 
  • Traders boost ECB rate-hike bets after oil price surge. 

The EUR/USD pair gains ground to near 1.1425 during the early Asian trading hours on Wednesday. The US Dollar (USD) weakens against the Euro (EUR) as softer-than-expected US inflation data temporarily eased pressure on the Federal Reserve (Fed). Traders will take more cues from the US Producer Price Index (PPI) report, which is due on Wednesday. 

US inflation, as measured by the US Consumer Price Index (CPI), declined to 3.5% YoY in June, down from the three-year high of 4.2% set in May, according to the US Bureau of Labor Statistics (BLS) on Tuesday. This figure came in softer than the market expectations of 3.8%. On a monthly basis, the headline CPI dropped by 0.4% in June, compared to a rise of 0.5% in May. 

Meanwhile, the core CPI, which excludes volatile food and energy prices, was unchanged on a monthly basis, and it was up 2.6% on a yearly basis, compared to the 2.9% increase seen in May and the market expectation of 2.8%. 

The chance of a July rate hike dropped to 16% from 42% on Monday, according to the CME FedWatch tool, although the probability of a rate increase this year was more robust at 80%, down from 89% on Monday.

Fed Chairman Kevin Warsh said on Tuesday that slowing inflation in June doesn’t mean it’s mission accomplished. On Monday, Fed Governor Christopher Waller said that rates may need to rise "in the near term" if data shows inflation remaining well above the central bank's 2% target.

Across the pond, traders boosted wagers on faster European Central Bank (ECB) interest-rate hikes after surging oil prices reignited inflation fears. Markets expect the ECB to raise the interest rates by 25 basis points (bps) in September, with another hike by year-end all but certain, according to Bloomberg. 

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.

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Lallalit Srijandorn

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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