EUR/USD holds steady above 1.1850 as markets eye Eurozone GDP, US CPI inflation releases
EUR/USD flat lines around 1.1870 in Friday’s early Asian session. The US Dollar is range-bound after mixed US economic data. Traders will closely monitor the flash Eurozone GDP and US CPI inflation reports on Friday for fresh impetus.The EUR/USD pair trades on a flat note near 1.1870 during the early Asian session on Friday. The major pair steadies amid mixed signals from the latest release of US economic indicators. Traders await the preliminary reading of the Eurozone Gross Domestic Product (GDP) for the fourth quarter (Q4) and US inflation data, which are published later on Friday.
Earlier this week, data showed that US Retail Sales were unexpectedly unchanged in December, indicating underlying weakness. The reading followed an unrevised 0.6% increase in November, worse than the expectation of 0.4%. However, the US Nonfarm Payrolls (NFP) data came in stronger than estimated in January. Traders continue to assess mixed US economic data and will take more cues from the US Consumer Price Index (CPI) inflation report on Friday for some hints about the interest rate path.
"Earlier in the week, we got retail sales numbers that made things look pretty bad and then we got payroll numbers, which were pretty much affirming the no-fire, no-hire environment that we have and one where the Fed is going to wait on hold until it gets a better sense on tariffs, inflation, and whether or not the retail sales numbers are actually signaling an impending recession," said Marvin Loh, senior global market strategist at State Street in Boston.
The European Central Bank (ECB) decided to hold its benchmark interest rate steady at 2.0% for the fifth meeting in a row last week, as widely expected. Traders raise their bets that policy will be steady all year before possible rate hikes next year, which could provide some support to the shared currency.
The Eurozone GDP is projected to grow 0.3% and 1.3% on a quarterly and annual basis, respectively, in Q4. Nonetheless, any signs of weakening in the Eurozone economy could drag the EUR lower against the Greenback in the near term.
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%).
What is the ECB and how does it impact the Euro?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.
How does inflation data impact the value of the Euro?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.
How does economic data influence the value of the Euro?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.
How does the Trade Balance impact the Euro?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.
