Euro weakens below 1.1750 as hotter US inflation bolsters US Dollar

EUR/USD softens to near 1.1735 in Wednesday’s early Asian session.
US CPI rose 3.8% YoY in April, the highest since May 2023.
ECB’s Nagel said rate hikes are increasingly likely.

Lallalit Srijandorn FXStreet

The EUR/USD pair trades in negative territory around 1.1735 during the early Asian session on Wednesday. The US Dollar (USD) edges higher against the Euro (EUR) on hotter-than-expected US inflation data. Traders brace for the US April Producer Price Index (PPI) report, which will be released later on Wednesday.

Annual inflation in the United States (US), as measured by the change in the Consumer Price Index (CPI), jumped to 3.8% in April from 3.3% in March, according to the US Bureau of Labor Statistics (BLS) on Tuesday. This figure came in above the market consensus of 3.7% and registered the highest since May 2023. On a monthly basis, the CPI increased by 0.6% in April, compared to 0.9% in March, matching analysts' estimates.

Additionally, the core CPI, which excludes volatile food and energy prices, rose 0.4% and 2.8% on a monthly and yearly basis, respectively. This inflation report has fueled bets on Federal Reserve (Fed) interest rate hikes later this year, further supporting the Greenback and creating a headwind for the major pair.

Across the pond, hawkish remarks from the European Central Bank (ECB) officials could lift the shared currency. Bundesbank President Joachim Nagel said on Wednesday that the probability that the central bank will need to raise borrowing costs due to the Iran war is rising.

Meanwhile, ECB Governing Council member Martin Kocher said on Monday that there’s no need to delay the interest rate hikes if energy prices don’t improve swiftly. Financial markets are now pricing in a 92% chance of a 25 basis point (bps) hike at the June meeting, with a total of three hikes anticipated by the end of 2026, according to Reuters.

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

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.

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