EUR/USD stays firm on US recession risks, US inflation in focus
- EUR/USD shows resilience near 1.0900 as US recession risks keep the US Dollar on the backfoot.
- US Commerce Secretary Lutnick sees President Trump’s policies as worthwhile despite they may lead to a recession.
- The Euro capitalizes on hopes of Ukraine’s ceasefire for 30 days and German debt restructuring plans.
EUR/USD ticks lower but stays near a five-month high, trading at 1.0920 in European trading hours on Wednesday. The major currency pair remains firm as the US Dollar (USD) is broadly on the backfoot due to increased concerns over the United States (US) economic outlook under the leadership of President Donald Trump.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises slightly after gauging temporary support near an over four-month low of 103.35.
The US Dollar underperforms as US President Trump’s tariff agenda has fuelled risks of an economic recession in the near term. Market participants expect Trump’s “America First” policies to boost inflationary pressures, eventually diminishing the purchasing power of households already battling high inflation.
Meanwhile, fears of a US recession escalated after comments from US Commerce Secretary Howard Lutnick in a CBS interview on Tuesday indicated that policies by the President are worthwhile despite they had prompted fears of a recession. Lutnick said, “These policies are the most important thing America has ever had, and they are worth it” after being asked whether it would be worth executing Trump’s policies even if they led to a recession.
On the domestic front, investors await the US Consumer Price Index (CPI) data for February, which will be published at 12:30 GMT. Investors will pay close attention to the US inflation data as it will influence market speculation over the Federal Reserve’s (Fed) monetary policy outlook. Year-over-year headline inflation data is estimated to have decelerated to 2.9% from the 3% increase seen in January. In the same period, the core CPI – which excludes volatile food and energy prices – is expected to have risen by 3.2% compared to the prior release of 3.3%.
Daily digest market movers: EUR/USD gains as Ukraine agrees to an immediate 30-day ceasefire
- EUR/USD has been advancing for over a week as the Euro (EUR) is outperforming on optimism over the German defense spending deal. Hopes for a clearance to German debt restructuring to boost defense spending accelerated after Franziska Brantner-led-German Green Party agreed to negotiate with likely next Chancellor Friedrich Merz and Social Democratic Party’s (SDP) co-leader Lars Klingbeil in a scheduled meeting on Thursday.
- Market participants expect that widening the German “debt brake” could be a game-changer for the Eurozone economy, assuming that the monetary stimulus will stimulate economic growth. Such a scenario would also force the European Central Bank (ECB) officials to reassess their monetary policy path. The ECB had been guiding that the interest rate path is clearly on the downside.
- Additionally, the acceleration in optimism over peace in Ukraine has increased the Euro’s appeal. On Tuesday, Ukraine agreed to an immediate 30-day ceasefire in a meeting with US officials in Saudi Arabia. US Secretary of State Marco Rubio said he would now take the offer to the Russians, Reuters report.
- Meanwhile, tariff policies by US President Trump continue to be a nightmare for the Euro. Trump’s tariff policies keep him in a dominant position while negotiating deals with his trading partners. On Tuesday, Canada’s Ontario Premier, Doug Ford, rolled back the 25% surcharge levied on electricity exported to the US after Trump threatened to increase levies on steel and aluminum imports from Canada to 50%.
Technical Analysis: EUR/USD wobbles inside Tuesday’s trading range
EUR/USD stays firm near 1.0900 and trades inside Tuesday’s trading range on Wednesday. The major currency pair strengthened after a decisive breakout above the December 6 high of 1.0630 last week. The long-term outlook of the major currency pair is bullish as it holds above the 200-day Exponential Moving Average (EMA), which trades around 1.0650.
The 14-day Relative Strength Index (RSI) jumps to near 75.00, indicating a strong bullish momentum.
Looking down, the December 6 high of 1.0630 will act as the major support zone for the pair. Conversely, the psychological level of 1.1000 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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