Euro retraces previous gains as Eurozone data paves the way for an ECB pause

EUR/USD eases to the 1.1430 area from session highs at 1.1475 and remains practically flat on daily charts.
Soft inflation and weak economic activity data in the Euro Area hint at an ECB pause in July.
Geopolitical uncertainty is weighing on risk aversion and buoying Oil prices, which adds pressure on the Euro

Guillermo Alcala FXStreet

The Euro (EUR) has given away most of the daily gains against the US Dollar (USD) on Friday, returning to the 1.1430 area from session highs at 1.1475, which leaves the pair practically flat on the daily chart. Soft economic data from Eurozone countries, coupled with geopolitical uncertainty and higher Oil prices, is posing a significant weight on the Euro rallies.

In Germany, June’s final Harmonized Index of Consumer Prices (HICP) confirmed previous estimations, showing that inflation slowed down to a 2.4% year-over-year (y-o-y) rate from 2.7% in May and from the April peak of 2.9%. Monthly inflation contracted 0.2%, also in line with preliminary estimations, and following a 0.1% contraction in May.

At a later time, INSEE revealed that France’s Consumer Price Index (CPI) was also in line with the preliminary estimations. Yearly inflation eased to a 2% rate in June, from 2.8% in May, and monthly inflation contracted at a 0.3% rate, following a 0.1% uptick in the previous month.

Finally, data from Italy revealed that the country’s Industrial Output contracted 0.3% in May, nearly reversing April's 0.4% increase, and exceeding the 0.2% fall anticipated by the market consensus. In the 12 months to May, factory output grew 1.1%, unchanged from April, against expectations of a 1.3% increase.

All in all, figures hinting at moderating price pressures, combined with sluggish economic activity that will most likely prompt the European Central Bank (ECB) to keep interest rates unchanged at its monetary policy meeting later in July.

The US Dollar, on the other hand, has pared some losses on Friday, with investors wary of risk amid the geopolitical uncertainty. US and Iran have halted hostilities, but the Strait of Hormuz remains practically closed due to the recent developments, with no clear plan to reopen it as Washington and Iran clash on the status of the waterway. This is keeping Oil prices buoyed and acting as a headwind for any significant Euro recovery.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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