The EUR/USD pair continues its downward trend for the third straight day, trading near 1.1640 during Thursday's Asian session. The decline is spurred by the US Dollar's (USD) strength, buoyed by robust US economic data. The recent spike in the United States Producer Price Index (PPI) and Retail Sales, coupled with a drop in the Unemployment Rate last week, strengthens the argument for the Federal Reserve (Fed) to maintain its current interest rates in the near term. Investors will be keeping an eye on the US Initial Jobless Claims report, due later today.
On Wednesday, the US Census Bureau revealed that Retail Sales increased to $735.9 billion in November, up 0.6% and surpassing the predicted 0.4% increase after a 0.1% decline in October. Additionally, November's PPI showed a significant rise, with both headline and core figures hitting 3% year-over-year. Following this data, Morgan Stanley analysts have postponed their anticipated timeline for rate cuts to June and September, moving away from their earlier expectations of January and April.
At an online event hosted by the Wisconsin Bankers Association, Minneapolis Fed President Neel Kashkari remarked on the economy's resilience and noted lower-than-anticipated tariff impacts. While he acknowledged that inflation remains high, he expressed optimism about its current trajectory.
Meanwhile, the Euro (EUR) stays under pressure despite cautious comments from European Central Bank (ECB) officials, who hint at a lack of urgency in raising interest rates. ECB Vice President Luis de Guindos pointed out on Wednesday that current market valuations may not fully account for the high global uncertainty, emphasizing that geopolitical risks heighten the potential for economic downturns.
MÄrtiĆĆĄ KazÄks, the Governor of the Bank of Latvia and ECB Governing Council member, highlighted the balanced nature of economic risks but warned of ongoing high uncertainty, including non-linear shock potential. He affirmed the ECB's commitment to its inflation goals, stating that it is well-positioned to manage the situation.
Understanding the Euro and ECB Influence
The Euro is the official currency for the 20 nations in the Eurozone and ranks as the second most traded currency globally, just behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange dealings, with a daily turnover exceeding $2.2 trillion. The EUR/USD currency pair is the most actively traded worldwide, making up about 30% of all transactions.
The European Central Bank (ECB) plays a crucial role in shaping the Euro's value by setting interest rates and managing monetary policy from its base in Frankfurt, Germany. The ECB's primary responsibility is to ensure price stability, either by controlling inflation or fostering growth. Interest rate adjustments are its main tool, with higher rates typically benefiting the Euro.
The ECB Governing Council, which includes national bank heads and permanent members, including President Christine Lagarde, meets eight times a year to make monetary policy decisions.
Impact of Inflation and Economic Data on the Euro
Eurozone inflation, tracked by the Harmonized Index of Consumer Prices (HICP), is a key indicator for the Euro. Higher-than-expected inflation, particularly above the ECB's 2% target, may lead to interest rate hikes to control it, potentially boosting the Euro. Conversely, weak economic indicators can weaken the currency. Data from the Eurozone's largest economiesâGermany, France, Italy, and Spainâis particularly influential, as these countries form 75% of the region's economy.
Trade Balance is another critical factor affecting the Euro's value. A surplus, where exports exceed imports, can strengthen the Euro by increasing demand for European goods, whereas a deficit can have the opposite effect.