EUR/USD flat lines near 1.0300 on softer US CPI data
- EUR/USD trades flat around 1.0295 in Thursday’s early Asian session.
- The softer US core CPI data revives Fed easing expectations, which cap the upside for the USD.
- Traders see the ECB delivering three or four rate cuts this year.
The EUR/USD pair holds steady around 1.0295 during the early Asian session on Thursday. The cooler-than-expected US Consumer Price Index (CPI) inflation data for December raises the bet that the US Federal Reserve (Fed) could cut interest rates twice this year, which weighs on the Greenback. However, rising concerns over Eurozone economic growth might cap the upside for the major pair.
The US Dollar (USD) declined after the US core CPI data came in softer than estimated, triggering expectations that the Fed's easing cycle may not be over yet. Markets now expect the US central bank to deliver 40 basis points (bps) of rate cuts by year-end, compared with about 31 bps before the inflation data.
Across the pond, the European Central Bank (ECB) delivered rate cuts four times last year, and traders expect three or four moves this year due to the concerns about the Eurozone's weak economic outlook. The rising bets of further interest rate reductions from the ECB could undermine the Euro (EUR) against the USD in the near term.
Later on Thursday, investors will keep an eye on Germany’s Harmonized Index of Consumer Prices (HICP) for December and the ECB Monetary Policy Meeting Accounts. On the US docket, the Retail Sales for December and weekly Initial Jobless Claims will be the highlights.
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.
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