EUR/USD steadies on Ukraine peace plan, ECB policy in focus
- EUR/USD demonstrates strength around 1.0500 as a positive development towards ending the war in Ukraine has improved the Euro’s appeal.
- The ECB is expected to cut interest rates by 25 bps on Thursday.
- US President Trump imposed 25% tariffs on Canada and Mexico and an additional 10% on China.
EUR/USD holds onto gains near the key level of 1.0500 in Tuesday’s European session. The major currency pair remains firm as European leaders, including Ukrainian President Volodymyr Zelenskyy, agreed to structure a peace plan to end the three-year-long war in Ukraine. Europe’s readiness to stop the massacre in Ukraine has improved the Euro’s (EUR) appeal, assuming that a truce between Russia and Kyiv would restore the fractured supply chain of the Eurozone.
This week, the major trigger for the Euro is the European Central Bank’s (ECB) monetary policy decision, which is scheduled for Thursday.
According to the February 19-27 Reuters poll, the ECB will cut its Deposit Facility Rate by 25 basis points (bps) to 2.5%. This would be the fifth interest rate cut by the ECB in a row, the sixth since the central bank started its easing cycle in June 2024. Dovish votes for the ECB’s interest rate decision were prompted by fears that United States (US) President Donald Trump’s tariff agenda will damage the Eurozone economic growth.
Additionally, ECB officials have remained confident that inflationary pressures will sustainably return to the desired rate of 2% this year.
Investors will pay close attention to the monetary policy statement and ECB President Christine Lagarde’s press conference after the policy decision. Market participants want to know when the ECB will return to a neutral stance and how Trump’s tariff agenda will impact the inflation outlook.
Daily digest market movers: EUR/USD remains firm as US Dollar is on backfoot
- EUR/USD steadies around 1.0500 as the US Dollar (USD) trades cautiously near Monday’s low even though fresh tariffs by US President Trump on Canada and Mexico, and additional levies on China, come into effect on Tuesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, appears vulnerable around 106.50.
- President Trump has imposed 25% tariffs on his North American partners and an additional 10% on China for pouring fentanyl into the US. Trump said to reporters on Monday, “No room left for Mexico or for Canada.” He added, “The tariffs, you know, they’re all set. They go into effect tomorrow.”
- In retaliation, China has also slapped tariffs on various agricultural imports from the US, which will take effect on March 10. The imposition of tariffs by the US on China and its neighbours has confirmed a global trade war. This scenario is unfavorable for the global economic outlook.
- Meanwhile, investors expect Trump’s tariff agenda will be inflationary for the US economy, assuming that the impact of higher levies will be borne by US importers, who would be forced to pass on higher input costs to consumers.
- On the economic data front, investors await a slew of US labor market-related data and the ISM Services PMI release this week. Investors will pay close attention to the US economic data as it will influence market speculation about the Federal Reserve’s (Fed) monetary policy outlook.
Technical Analysis: EUR/USD holds onto gains around 1.0500
EUR/USD trades firm near 1.0500 in European trading hours on Tuesday. The major currency pair trades above the 20-day Exponential Moving Average (EMA), which is around 1.0440, suggesting that the near-term trend is bullish.
The 14-day Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, which indicates a sideways trend.
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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