EUR/USD rises above 1.0400 ahead of Eurozone HICP inflation data
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Akhtar Faruqui
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03 Mar @ 01:00 (GMT+0)

EUR/USD rises above 1.0400 ahead of Eurozone HICP inflation data

  • EUR/USD gains as the latest US PCE inflation data aligns with expectations, easing concerns over unexpected US inflation spikes.
  • A slight increase in US Treasury yields could help limit the downside of the US dollar.
  • Traders look to the Eurozone HICP inflation data for further direction ahead of Thursday’s ECB policy decision.

EUR/USD pauses its three-day losing streak, trading around 1.0410 during Asian hours on Monday. The pair’s recovery is driven by a weaker US Dollar (USD) following the release of January’s Personal Consumption Expenditures (PCE) inflation data on Friday, which aligned with forecasts and eased concerns about unexpected inflation spikes in the United States (US).

The US PCE inflation report met expectations, with the monthly headline PCE holding steady at 0.3%. Core PCE rose slightly to 0.3% from December’s 0.2%, while the annual headline PCE stood at 2.6%, slightly exceeding projections but unchanged from December’s figure. Core PCE eased to 2.6%, down from a revised 2.9% in December.

The US Dollar Index (DXY), which tracks the USD against six major currencies, weakens after three consecutive sessions of gains, hovering around 107.30 at the time of writing. However, the downside of the Greenback could be limited as US Treasury yields improve, with 2-year and 10-year Treasury yields currently standing at 4.02% and 4.24%, respectively.

Meanwhile, escalating US-China trade tensions could support safe-haven flows into the US Dollar, potentially capping EUR/USD’s gains. Over the weekend, US President Donald Trump announced an additional 10% tariff on Chinese imports starting Tuesday, adding to the initial 10% rate imposed last month. On Thursday, Trump also stated on Truth Social that 25% tariffs on Canadian and Mexican goods will take effect on March 4.

The Euro (EUR) gains strength against its peers following stronger-than-expected February flash Harmonized Index of Consumer Prices (HICP) data from Germany, released on Friday. Despite the hotter inflation report, the European Central Bank (ECB) is expected to continue easing monetary policy in its meeting on Thursday. Investors now await the Eurozone’s HICP inflation data, set to be released later in the day.

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.