EUR/USD gains ground above 1.1250 ahead of US Retail Sales release
- EUR/USD remains firm near 1.1285 in Wednesday’s early Asian session.
- Fed’s Waller said if the impact of tariffs threatens a deep economic slowdown, then he would back a sooner rate cut.
- The ECB is expected to cut interest rates by 25 bps on Thursday.
The EUR/USD pair trades in positive territory around 1.1285 during the early Asian session on Wednesday. The US Dollar (USD) currently trades near a three-year low against the Euro (EUR) as trade tensions remain well in place. Traders brace for the US Retail Sales report and the speech of Federal Reserve (Fed) Chair Jerome Powell on Wednesday.
Fed Governor Christopher Waller said on Monday that the Trump administration's tariff policies were a major shock to the US economy that could lead the central bank to cut rates to head off recession even if inflation remained high. Meanwhile, Atlanta Fed Bank President Raphael Bostic suggested that the Fed bank should stay on hold until there is more clarity.
According to the CME FedWatch tool, the markets are now pricing in nearly 85 basis points (bps) worth of monetary policy easing by the end of the year, with most expecting the Fed to hold rates next month.
Across the pond, the European Central Bank (ECB) is widely anticipated to cut interest rates by 25 bps on Thursday amid growing recession concerns tied to US tariffs. Hadrien Camatte, senior economist at Natixis, said the ECB may cut all three key interest rates at its April meeting on Thursday. The ECB lowered interest rates for the second consecutive time in March, bringing the deposit rate down to 2.5%. A further reduction would see the rate reduced to 2.25%.
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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