EUR/USD rises as risk-premium of US Dollar diminishes
- EUR/USD edges slightly higher as the US Dollar declines, with investors seeming less fearful about President Trump’s tariff threats.
- The FOMC Minutes showed on Wednesday that officials are concerned over upside risks to inflation.
- ECB’s Schnabel expected the central bank to pause the policy-easing cycle.
EUR/USD ticks higher to near 1.0440 as the US Dollar (USD) declines in Thursday’s European session. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls to near 106.90. The Greenback appears to have resumed its downside journey after a mild recovery earlier this week as investors expect United States (US) President Donald Trump’s tariffs agenda won’t be much more terrifying than the market had anticipated.
Till now, President Trump has imposed 25% tariffs on steel and aluminum, 10% on all imports from China, and has threatened to introduce reciprocal tariffs, with a 25% levy on automobiles, semiconductors, and pharmaceuticals by April. Market participants had anticipated that Trump would force tariffs soon after returning to the White House.
Meanwhile, Donald Trump has mentioned that he refrained from imposing tariffs immediately to allow local manufacturers enough time to increase their operating capacity. Market experts believe that US trading partners would be able to negotiate a deal with Trump in the meantime, and the impact of tariffs would remain limited on the global economy.
Apart from Trump’s tariff agenda, growing optimism over the Russia-Ukraine truce has also diminished the risk premium of the US Dollar. President Trump has agreed to hold more talks with Russia, including Ukraine and Europe, to end the war in Ukraine.
A Russia-Ukraine peace agreement would have a favorable impact on the Eurozone. The truce would improve the global supply chain and lower energy prices. The Eurozone used to be significantly dependent on Russia for energy imports before its war with Ukraine.
Daily digest market movers: EUR/USD ticks higher amid weakness in US Dollar
- EUR/USD edges higher as the US Dollar struggles for a firm footing even though Federal Open Market Committee (FOMC) minutes for the January meeting showed on Wednesday that policymakers hesitated to continue easing the monetary policy amid concerns over a sticky inflation outlook.
- The FOMC Minutes revealed that producers will pass on the import tariff cost to consumers, according to the output policymakers have received from business owners. Such a scenario will increase inflationary pressures and allow the Fed to maintain a restrictive monetary policy stance for longer. Technically, hawkish FOMC Minutes should have supported the US Dollar, but Trump’s economic policies are driving the asset.
- In the Eurozone, traders have fully priced in three more interest rate cuts by the European Central Bank (ECB) by this summer. However, ECB executive board member Isabel Schnabel said on Wednesday that she expects the central bank could announce a "halt" in the monetary expansion cycle as risks to inflation have "skewed to the upside" while borrowing costs had eased a lot. Schnabel warned that domestic inflation was "still high" and wage growth was "still elevated", amid "new shocks to energy prices".
- Going forward, the major trigger for the US Dollar and the Euro (EUR) will be flash Purchasing Managers Index (PMI) data for February, which will be released on Friday. In Thursday’s North American session, investors will focus on the Initial Jobless Claims data for the week ending February 14.
Technical Analysis: EUR/USD oscillates inside Wednesday’s trading range
EUR/USD trades inside Wednesday’s trading range around 1.0440 in European trading hours on Thursday. The 50-day Exponential Moving Average (EMA) continues to offer support to the major currency pair around 1.0430.
The 14-day Relative Strength Index (RSI) struggles to break above 60.00. A bullish momentum would activate if the RSI (14) manages to sustain above that level.
Looking down, the February 10 low of 1.0285 will act as the major support zone for the pair. Conversely, the December 6 high of 1.0630 will be the key barrier for the Euro bulls.
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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