EUR/USD edges lower below 1.1400 amid trade uncertainty
- EUR/USD softens to around 1.1380 in Friday’s early Asian session.
- Trump said the US was negotiating with China on trade after Beijing’s denial.
- Traders have become increasingly confident that the ECB will cut interest rates in the June meeting.
The EUR/USD pair weakens to near 1.1380 during the early Asian session on Friday. However, the downside for the major pair might be limited as investors remain concerned about the US-China trade tensions. Later on Friday, the final reading of Michigan Consumer Sentiment will be released.
US President Donald Trump said late Thursday that his administration was talking with China on trade. Meanwhile, China said that no negotiations had been held on the economy and trade, and it urged the US to lift all unilateral tariff measures if it really wished to resolve the issue. Persistent concerns over potential tariff threats by Trump and persistent trade tensions are likely to weigh on the Greenback and act as a tailwind for EUR/USD in the near term.
"It seems like there's a gulf as wide as the Pacific Ocean between how the U.S. and China are viewing trade," said Matt Weller, head of market research at StoneX. "And I think as long as that gulf remains, the rallies in the dollar might be short-lived.”
Across the pond, traders raise their bets that the European Central Bank (ECB) will cut interest rates in the June policy meeting due to the dovish remarks from the ECB policymakers. This, in turn, undermines the shared currency against the USD.
ECB policymaker and Finnish central bank governor Olli Rehn said on Thursday that the central bank should not rule out a "larger interest rate cut". Meanwhile, ECB Governing Council member Madis Muller said on Wednesday that the central bank may have to lower interest rates to levels that stimulate the economy if trade uncertainty proves more damaging to growth.
Euro FAQs
The Euro is the currency for the 19 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.
Recommended Articles
