EUR/USD steadies after registering nearly 0.5% gains in the previous session, trading around 1.1620 during the Asian hours on Monday. However, the pair may further appreciate as the US Dollar (USD) could continue to struggle amid escalating trade tensions between the world’s two largest economies, the United States (US) and China, along with the ongoing US government shutdown.
US President Trump commented on Friday that there was no reason to meet with China’s President Xi Jinping during the upcoming summit in South Korea in two weeks. Trump also announced plans to impose 100% tariffs on Chinese imports. In response, China warned that it will retaliate if Trump fails to back down on his threat to impose 100% tariffs on Chinese imports, raising fears of how the trade war will impact the US economy.
The first US Federal paychecks for October were expected on Friday but were delayed due to the government shutdown. The disruption is expected to continue at least until Tuesday, as the United States observes the Columbus Day holiday on Monday, with no resolution to the shutdown yet in sight.
The EUR/USD pair also draws support as the Euro (EUR) gains ground amid easing political tensions in France, where President Emmanuel Macron is set to appoint a new prime minister after Sebastien Lecornu’s resignation. Investors’ sentiment improved as Lecornu indicated that dissolving parliament and thus holding snap elections was unlikely.
The European Central Bank’s (ECB) September meeting accounts showed that policymakers broadly agreed the current policy stance remains consistent with the 2% medium-term inflation target. ECB members concurred that current interest rates are sufficiently strong to handle potential shocks amid two-sided inflation risks.
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.
