Euro trades with caution against US Dollar in countdown to US CPI data
- Euro edges down against the US Dollar ahead of the US CPI data for July.
- Traders have trimmed hawkish Fed bets due to weak US NFP data.
- Higher oil prices would continue to weigh on the Euro.
The Euro (EUR) trades marginally lower at around 1.1534 against the US Dollar (USD) at the start of the European trading session on Wednesday. The major currency pair edges down as investors turn cautious ahead of the United States (US) Consumer Price Index (CPI) data for July, which will be published at 12:30 GMT.
At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades slightly higher to near 99.90.
According to estimates, the US headline CPI grew at an annual pace of 3.4%, slower than 3.5% in June. In the same period, the core CPI – which excludes volatile food and energy items – is also seen lower at 2.5% Year-on-Year (YoY) from the previous reading of 2.6%. On a monthly basis, the headline and core inflation grew by 0.1% and 0.2%, respectively.
Signs of price pressures cooling down would ease fears of Federal Reserve (Fed) interest rate hikes further, which have already subsided significantly in the past few days, following the release of weak US Nonfarm Payrolls (NFP) figures for July.
US labor market stumbles as July payrolls disappoint
According to TD Securities, the latest US employment report marked a clear setback for the labor market. The bank highlights that July payrolls "surprised sharply to the downside on Friday, posting -23k job gains," with the weakness compounded by "negative revisions subtracting 103k jobs from May and June." While the unemployment rate "declined again to 4.1%," TD Securities stresses this occurred "for 'bad reasons' as the participation edged down again," underscoring a deterioration in labor force engagement rather than an improvement in underlying job conditions.
Meanwhile, the Euro (EUR) trades cautiously due to rising energy prices amid restricted oil supply in the wake of Middle East tensions. Squeezed energy supply through the Strait of Hormuz and Bab al-Mandab Strait has boosted energy prices.
Given that the Eurozone relies heavily on energy imports to meet its needs, higher oil prices bode poorly for the shared currency.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
