The EUR/USD pair remains stable near 1.1870 during the early Asian session on Friday. The main pair holds amid mixed signals from the latest release of US economic indicators. Traders are awaiting the euro zone’s flash reading of gross domestic product (GDP) for the fourth quarter (Q4) and US inflation data, which will be released later on Friday.
Data earlier this week showed that U.S. retail sales were unexpectedly flat in December, pointing to underlying weakness. The reading followed an unadjusted gain of 0.6% in November, worse than expectations of 0.4%. However, U.S. nonfarm payrolls (NFP) data were stronger than estimated in January. Traders continue to assess mixed U.S. economic data and will take more cues from Friday’s inflation report in the form of the U.S. Consumer Price Index (CPI) for some guidance on the path of interest rates.
“We got retail sales data earlier in the week that made things look pretty bad, and then we got payroll data that largely confirmed that we have an environment where there are no workers, no workers, where the Fed is going to wait until they get a better picture of what’s going on with tariffs, inflation and whether the retail sales data actually signals a coming recession,” said Marvin Loh, senior global market strategist at State Street in Boston.
The European Central Bank (ECB) last week decided to keep its benchmark interest rate stable at 2.0% for the fifth time in a row, in line with broad expectations. Traders are betting that policy will remain stable throughout the year ahead of possible rate increases next year, which could provide some support for the single currency.
In the fourth quarter, euro area GDP is forecast to grow by 0.3% and 1.3% quarterly and annually, respectively. However, any signs of weakening of the euro zone economy may cause the euro to fall against the US dollar in the near term.
Frequently asked questions about the euro
The euro is the currency of the 20 European Union countries belonging to the euro zone. It is the second most widely traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with average daily turnover exceeding $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% discount on all trades, 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 euro area. The ECB sets interest rates and manages monetary policy. The ECB’s primary task is to maintain price stability, which means controlling inflation or stimulating economic growth. Its basic tool is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – will usually benefit the euro and vice versa. The Governing Council of the ECB takes decisions on monetary policy at meetings held eight times a year. Decisions are made by the heads of the euro zone’s national banks and six indefinite members, including ECB President Christine Lagarde.
Inflation data in the euro area, measured by the Harmonized Index of Consumer Prices (HICP), is an significant econometric indicator for the euro. If inflation rises more than expected, especially above the ECB’s target of 2%, this obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to interest rates will typically benefit the euro as they make the region more attractive as a place to park money for global investors.
The published data are used to assess the condition of the economy and may affect the euro. Indicators such as GDP, PMIs for industry and services, employment and consumer sentiment surveys may influence the direction of the common currency. A sturdy economy is good for the euro. Not only will it attract more foreign investment, but it may prompt the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is delicate, the euro will likely fall. The economic data for the four largest eurozone economies (Germany, France, Italy and Spain) is particularly significant as they constitute 75% of the eurozone economy.
The next significant data release for the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what the country spends on imports over a given period. If a country produces a highly sought after export, its currency will only appreciate in value due to the additional demand generated by foreign buyers wanting to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa in the case of a negative balance.
