EUR/USD maintains position above 1.1100 ahead of US inflation data
- EUR/USD may come under renewed pressure as the US Dollar remains supported by encouraging developments in US-China trade talks.
- The US and China have reached a preliminary agreement to significantly reduce tariffs, signaling a potential easing of trade tensions.
- The European Central Bank could prolong its monetary easing cycle in response to declining inflationary pressures.
EUR/USD opened with a bullish gap on Tuesday during the Asian session, trading near the 1.1110 level after suffering losses of over 2.5% in the previous session. The pair faced challenges as the US Dollar (USD) strengthened on the back of progress in the United States (US)-China trade negotiations.
Over the weekend, the United States and China reached a preliminary agreement in Switzerland aimed at significantly reducing tariffs, signaling a potential de-escalation in trade tensions. Under the deal, the US will lower tariffs on Chinese goods from 145% to 30%, while China will cut tariffs on US imports from 125% to 10%. The development has been well-received by markets as a step toward stabilizing global trade relations.
Attention now turns to the upcoming US Consumer Price Index (CPI) report for April, due later on Tuesday. Economists expect headline inflation to rebound to 0.3% month-over-month from -0.1% previously, while core CPI is also projected to rise to 0.3% from 0.1%. On a yearly basis, both measures are forecast to remain unchanged.
Meanwhile, the Euro (EUR) remains under pressure amid growing expectations that the European Central Bank (ECB) may extend its monetary easing cycle in response to waning inflation. Several ECB officials have hinted at further rate cuts, citing persistent trade uncertainties and a sustained disinflation trend.
However, ECB Executive Board member Isabel Schnabel offered a more cautious perspective in a speech at Stanford University on Friday. She argued that current rates are appropriate and should remain in neutral territory. Schnabel also warned of medium-term inflation risks potentially breaching the ECB’s 2% target due to ongoing global economic disruptions.
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.