EUR/USD holds ground after five days of losses, trading around 1.1650 during the Asian hours on Friday. Traders remain cautious ahead of the US Nonfarm Payrolls (NFP) report, which is expected to offer further insight into labor market conditions and the Federal Reserve’s (Fed) policy outlook. December NFP is forecast to show job gains of 60,000, down from 64,000 in November.
However, the pair could face further downside as the US Dollar (USD) strengthens following the release of US weekly labor market data. The US Department of Labor (DOL) reported on Thursday that Initial Jobless Claims rose modestly to 208,000 in the week ended January 3, slightly below market expectations of 210,000 but above the previous week’s revised 200,000. Continuing jobless claims increased to 1.914 million from 1.858 million, indicating a gradual rise in the number of people remaining on unemployment benefits.
In the Eurozone, the European Commission’s Business Climate Index improved to -0.56 in December from -0.66, signalling a modest stabilisation in corporate conditions. Consumer Confidence strengthened to -13.1 from -14.6, while the Economic Sentiment Indicator edged down to 96.7 from 97.1.
Eurozone Producer Price Index (PPI) rose 0.5% month-over-month (MoM) in November, accelerating from 0.1% previously and well above market expectations of 0.2%. On a year-over-year (YoY) basis, producer prices declined 1.7%, extending the run to a fourth consecutive month of annual contraction. Meanwhile, the Eurozone unemployment rate edged down to 6.3% in November from 6.4%.
ECB Vice President Luis de Guindos said on Thursday that the current level of interest rates is “appropriate,” adding that inflation is now at target, though uncertainty remains very high.
BBH FX analysts report that the ECB’s latest consumer survey shows inflation expectations holding steady, reinforcing the case for keeping rates unchanged at 2.00%. The ECB’s November CPI consumer expectations survey suggests the central bank is well positioned to remain on hold. Inflation expectations for 1, 3, and 5 years were unchanged at 2.8%, 2.5%, and 2.2%, respectively, consistent with inflation stabilizing around the ECB’s 2% medium-term target.
Euro FAQs
The Euro is the currency for the 20 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.
